Not only do recent trading patterns suggest short covering played a role in the recent oil price spike, but declining open interest also says new money is holding off entering after such a fast runup.
Oil’s rally to a record above $135 a barrel came as traders bought crude to cover wrong-way bets that prices would decline, according to data from the New York Mercantile Exchange.
The number of outstanding futures contracts, known as open interest, fell 8.1 percent in a week to 1.36 million at the same time that prices rose 2.6 percent, the data show. Falling open interest and rising prices are signs that traders are buying to exit so-called short positions that would profit if oil fell, and lose money as they rose.
“In a market like today, which is trending higher while open interest is falling, it’s a sign that money is moving out of the market,” said Stephen Schork, president of Schork Group Inc. in Villanova, Pennsylvania. Open interest in Nymex crude futures peaked this year at 1.5 million on March 13….
Open interest has been sliding for months, after the number of outstanding crude futures reached a record 1.58 million on July 16, 2007.
“It is not a growing market, it is a shrinking market in terms of open interest,” said Olivier Jakob, managing director of Petromatrix Gmbh in Zug, Swizterland. “It is also facilitating the move upward.”
Oil prices have closed at record highs on 27 days so far this year, prompting OPEC oil ministers including Saudi Arabia’s Ali al-Naimi to declare that the rally is led by investors, rather than a shortage of supply.