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Sifting Through COT Reports


The next two weeks should continue to be volatile for crude as the market turns its attention to Iran.

At MM3, Prof. Dingmann and I spoke about the COT reports and how they can be a useful piece of information when looking at crude oil. Below is a chart I showed in the Energy breakout session that shows the net commercial position in crude futures and the price of crude oil. When the net commercial position is short, crude price tends to decline or trend sideways. When the net commercial position is long, crude price tends to rise or at least stops going down.

The COT reports are released at 3:30pm EST on Fridays and reflect data as of the previous Tuesday. The latest COT report for crude reflects data as of Tuesday, August 15th. As you can see, commercials (smart money) increased their short position again.

Another tool I use to analyze the COT reports for crude is the %R indicator for both net commercial position and open interest. The %R indicator for net commercial position looks at the current position in crude futures compared to the previous 26 weeks. Currently, commercials are net short almost 75,000 futures contracts which is close to a 26 week high. This produces a %R value close to -100 which is considered bearish.

Open Interest is another important data point I monitor as I like to gauge the market's interest in crude. Open Interest is currently at all time highs (over 1.2 Million contracts) as of the last COT report, so the %R for Open Interest is also bearish.

The next two weeks should continue to be volatile for crude as the market turns its attention to Iran. The United States and others submitted a proposal to entice Iran to stop work on its nuclear program. Iran has promised to respond formally by Tuesday. The UN Security Council has given Iran until August 31 to stop work on its nuclear program or face sanctions. While the net commercial position and open interest continue to be bearish for crude, geopolitical tensions surrounding Iran and its response to the West in the coming weeks should continue to drive crude prices in the near-term.
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