In 2008 oil prices tanked, dropping from $197 a barrel to just $69 in less than eight months. Ever since then, oil prices have gone nowhere, trading in a tight range between $80 and $110.
That’s about to change…
Institutional traders – investment banks, hedge funds, etc. – have been loading up on futures contracts of crude oil. I know this from the Commitment of Traders Report, which calculates the net position of this group. Turns out these “smart money” traders started piling into oil in early 2009 already.
In 2010, when oil prices were about $100 a barrel, institutional traders were long 136,000 contracts. They continued buying more in 2011… and in 2012… and they’re STILL buying this year.
The “smart money” side is now long nearly 268,000 contracts.
Take a look…
As you can see, hedgers are on the other side of this trade. While institutional traders have been buying more and more, hedgers have been selling.
But here’s the thing… hedgers don’t buy and sell futures contracts with the goal of making a profit. They’re simply trying to smooth out the volatility in the price they pay or get for oil.
That’s why it makes more sense to follow the smart money than the hedgers. These large institutional traders are the ones who typically move the market. When they’re buying, prices go up.
And they’re buying. En masse.
This range-bound market can’t last much longer. Not with record-high buying activity from the professional trading desks. I expect oil prices to break higher as we get closer to the summer driving season.
Watch for crude to head north of $100 a barrel over the next two months.
If you haven’t done so already read the Survive & Prosper issue on “Demographic Trends Show There’s No Escaping The Next Financial Meltdown.”