With Lower Volatility, Open Interest Will Grow

Using the open interest metric, an investor can determine the support behind the current trend and whether it has the liquidity to continue. Technically defined, open interest is the amount of contracts that are open on the market at any given time. The data is usually provided in aggregated form which is the sum of the open interest of each monthly contract. As expected, the month up next for delivery will have the highest open interest as traders try and put themselves in a good position by the delivery date. The data, provided by the CME group and the CFTC, is used by traders to measure where the money in the market is located. The CFTC records weekly trader commitment data which differentiates between long and short positions as well as different kinds of traders. Analysis of this data, in particular, describes the fuel behind the trend.

Open interest data can be hard to find especially if you want to use historical open interest data to analyzed past trends. The CME provides difficult to read daily bulletins with hundreds of different futures contracts to sift through. Reports from the CFTC are easier to read, but they only provide data for weekly open interest. On the other hand, their breakdown of the commitment of traders is very detailed and comprehensive. Using these reports, I will begin to compile a data series for crude oil futures contracts traded on NYMEX that can be found on the data tab on this website. There should be some free source of this data as the metric is extremely valuable when analyzing the futures market.

Over the past month, futures contracts have been trading at highs for the year. A year to date rebound of  18.84 percent has shrunk losses over the past 52 weeks to -21 percent. The WTI spot price hasn't been this high since November 10th, just before a plunge ran into the new year. The new bulls have created new hopes for oil and gas companies looking to lock in higher prices for their crude oil on the market. Platts reports that a number of companies are looking to get more involved with futures trading in the next couple of months. The U.S. oil markets are quickly tightening as production dropped below 8.9 million b/d last month after peaks of 9.5 million b/d last year. Companies like Devon Energy, ConocoPhillips, Marathon Oil, and Pioneer Natural Resources are just a few who discussed their plans to get in on the action with Platts. Open interest data showed a growing market as prices jumped from April 5th to April 12th. About 30,000 open contracts were opened during that same period. The chart shows how traders joined the market as prices posed a significant rebound. The next week's losses in both open interest and price could be attributed to non-commercial traders cashing in on short-term profits. A solid rebound could be in store with more gradual increases in open interest and price as May closes out. Although, if open interest drops for the second week in a row, a bearish signal of less liquidity could signal lower prices.

The CFTC's Commitment of Traders data allows investors to dissect the futures market into the individual contracts that make it. In the chart above, a comparison of long and short positions suggests how producers and merchants are trading. Currently, short positions heavily outweigh the long positions representing the lasting effect of falling prices earlier this year, There are still a low of companies out there that are hedging against the worst scenario, another possible crash sending prices to the $30's. On the other hand, long positions grew at a faster rate over the past six weeks as building bullishness is encouraged by Goldman Sach's new hopeful oil price analysis. Expectations are slowly improving as the futures market sidesteps from its typical volatility. Barring any major events or energy fundamental change, slowing U.S. production will dampen the fluctuations that have scared hedgers away from the WTI market. With this in mind, rising open interest could support a stronger recovery into the $50's if all holds throughout the rest of the year.


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