Two months ago, just before crude dropped to 13 year lows, we warned oil traders that there is "a constant short squeeze threat" because "oil shorts are at all-time highs", adding that "we have seen extreme short positioning building up in the oil futures market. The quantity of short positions opened is at an all-time high for Brent, and still high for WTI futures."
We also warned that "a positive surprise could happen quite sharply, as short positions are likely to be squeezed by a profit-taking move. On WTI, the in-the-money short positions are really dominating at the front end of the curve while out-of-the-money long positions are dominating at the long end of the curve: the front end of oil curve could thus be more exposed to some profit-taking."
It was, and just a few days later, the algos took this warning to heart and, courtesy of the most recurring headline (that of a "farcical" oil production freeze) as a recurring catalyst, unleashed an historic short squeeze. Actually make that a record short squeeze.
Wait, that's impossible: surely it was more than just shorts covering and oil rose because actual longs were piling in, one could say.
One would be wrong, and it is now official: as crude soared 50% since Feb. 11, Bloomberg writes, the number of bets on increased prices has barely budged. "Instead, the upward pressure on prices appears to have come from traders cashing out of bearish wagers at an unprecedented pace. The liquidation of short positions during the last seven weeks covered by data from the U.S. Commodity Futures Trading Commission was the largest on record."
"The rally has come from shorts getting scared out of their positions, and you’re not seeing a lot of money coming in on the long side," said John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy. "It really calls into question the fortitude and staying power of the rally."
The details: "short positions on West Texas Intermediate crude, or bets that prices will fall, have dropped by 131,617 contracts since Feb. 2, the biggest liquidation in CFTC data going back a decade. To close out a bearish position, traders buy back futures and options, putting upward pressure on prices. In the same period, bullish wagers fell by 971. In the past 10 years, there have been only two other seven-week short-covering streaks, CFTC data show. The first started in September 2009 and the second in December 2012. Both were much smaller than the recent one and were accompanied by oil rallies."
It gets better: as we showed previously, the irony is that as oil futures shorts were squeezed out, ETF longs actually declined instead of growing as absolutely nobody - except those who have to buy-in - believes this quote-unquote rally.
Bloomberg notes that the rebound faltered a day after WTI prices touched a four-month high of $41.45 a barrel on March 22, tumbling 4 percent in New York after government data showed U.S. crude supplies surged the prior week to the highest level since 1930.
Perhaps there are no more shorts left to squeeze, in which case watch out to the downside: "When energy markets get loaded to one side of the boat like that, you can have vicious reversals," said Kilduff. And vice versa.