• According to news headlines to start this week, not enough people died during this past weekend's increased Middle East violence, leading to a selloff in WTI crude oil. 

• Technically, the market still looks bullish but has struggled to find new buying interest from the investment side of the market. 

• Fundamentally, WTI remains bullish, as indicated by the backwardation in the market's forward curve. 

Recently, I’ve talked about applying my Market Rules to a gold market that continues to find buying interest despite posting new all-time highs nearly every week, and a corn market that seems to be drawing attention from both commercial and noncommercial traders. But what about the third King of Commodities, King Crude Oil? 

As you’ll recall, this began with the spot-month WTI crude oil contract getting drilled to the tune of $4.86 before closing Monday with a loss of $4.40 (6.1%). The headlines associated with the selloff were sad, or maybe just a reflection of the world that we’ve created, with the general consensus being not enough people were killed or crude oil supplies destroyed by this past weekend’s missile attack by Israel on Iran. But was there more to it than that? Let’s take a look at the structure of the market to see the “what” behind market activity rather than making up reasons “why” (Newsom’s Market Rule #5). 

Given the investment side sets the trend (Newton’s First Law of Motion applied to markets), generally speaking, what do we see on crude oil’s continuous weekly chart? The spot-month contract (CLZ24) completed a bullish spike reversal the week of September 9, telling us the intermediate-term trend had turned up. This tells us Watson (my name for the algorithm-driven investment side of the market) was likely to come back to the market as a buyer. Has this happened? 

Tracking weekly CFTC Commitments of Traders report (legacy, futures only) numbers we see funds held a net-long futures position of 140,014 contract the week of September 10. From there, the position grew to a net-long of 190,637 contracts the week of October 8, an increase of roughly 50,600 contracts. However, a closer inspection of the numbers shows funds increased their long futures position by 12,231 contracts during that time frame while decreasing their short futures position by 38,392 contracts. As I’ve talked about in the past, an increase in the net-long futures position driven primarily by short-covering is not as bullish as one where the bulk of the activity is the addition of new long positions. This raises the next question; will the market see increased buying interest? 

Newsom’s Market Rule #6 tells us, “Fundamentals win in the end”, and we know WTI crude oil fundamentals remain bullish. What’s that you ask? How do we “know” this when markets are filled with contradictory government numbers and media stories? By ignoring those two items and focusing on the market’s forward curve. A look at this chart for WTI shows the market remains backwardated (inverted for those of us not from New York), for the most part, from the December 2024 contract through December 2029. This means nearby futures contracts are higher priced than deferred issues reflecting commercial interests pushing the nearby contract in relation to deferred issues in an attempt to source supplies to meet demand[i].

So, if one of our reads on real market fundamentals is telling us the long-term outlook is bullish, then why isn’t Watson buying? Recall I wrote about which commodity markets could find increased investment buying interest the last quarter of 2024 back in late September, and WTI crude oil had solid potential based on its forward curve. A month later, and it hasn’t panned out, but much could still happen. 

Last, but certainly not least, we have the US presidential election coming up next week. My thoughts on what is happening is well known, so I won’t go into it further in this piece[ii], but in terms of the crude oil market the key takeaway is a recent story (from MarketWatch, if I recall) talking about how the petroleum industry is pushing hard for political change. There were a number of reasons discussed, and one that wasn’t: Going back to the days of “hardship” waivers being handed out like Halloween candy to US refiners. 

We don’t know how next week is going to play out, though most folks are absolute in saying they actually do. We also don’t know exactly how the crude oil market could develop, though the market is in a similar position as it was a month ago, on the cusp of becoming bullish from both commercial and noncommercial buying. But there is a kaleidoscope of butterflies fluttering leaving the door open to unexpected twists and turns. 

[i] This topic always reminds me of the story of my meeting with the president of the company I was working for at the time. He was also an “economist”, among other things, and was certain my take on futures spreads and forward curves was incorrect. His thought, along with others in the in the economics world, was that lower priced deferred contracts meant supply and demand was bearish because the market was indicating prices would be lower over time. I had the indescribable pleasure of looking at him from across the table and saying, “You are wrong, and here’s why”. 

[ii] Let’s just say my thoughts are such that I’ve had television interviews cancelled once my notes on markets and the election were shared.