Trader’s Narrative

A few weeks before crude oil topped out at $147.90 in July 2008, I kept pointing out that something was just not right with that market. In “What is Really Going on With the Price of Crude Oil?” I pointed out the role of large institutional funds and a few days later I showed a graph of the inflation adjusted price of crude oil which should have put the question to rest.

Follow the above link to see the chart because I truly marvel at how anyone could have looked at that and not realized that what we were seeing was not “peak oil” but the same imbalance that any run of the mill bubble produces. The 2008 run-up dwarfed both the late 1970’s oil shock and the 1991 Persian Gulf war spike.

Since then, we’ve seen the great unwinding of that frenzy take oil down to $35 - less than a quarter of its high in 2008. But now hedge funds and large institutional traders are, once again, returning to commodities in a big way. Below is a chart of the large speculators’ net long positions according to the US Commodity Futures Trading Commission:

Source: Bloomberg

Of course this shows all 20 major commodities monitored by the CFTC. Oil is in there somewhere having recovered its 200 day moving average, and risen 85% from its low in late 2008. But the money is flowing to agricultural products, metals and softs as well.

All that it will take is for the large speculators to pile on as they did before and the commodity bull will become a self-fulfilling prophecy. While that may nip the ‘green shoots’ it may also cancel out any remaining deflationary pressures.