The futures’ positions of the commercial players remains largely unchanged since last week when we saw the oil price spike up to $55 dollars a barrel and despite today’s fall in the spot market my view remains unchanged and has been reinforced by the monthly WTI crude oil chart which shows a long legged doji followed by a hammer – two classic reversal signals which suggest that we are now at the bottom of a long waterfall of prices.

The reversal in crude oil prices now seems to be in place, with the COT index moving firmly away from the extreme of two weeks ago, which suggested that we should see bullish trend starting in oil prices, which now seems to be the case in the daily oil price, as it breaks out from the sideways consolidation of the last few months, a moves above the $50 per barrel region. Supported by the moving averages this move now seems to have some momentum, and we should now see this reflected in the COT index for oil over the next few weeks.

The weekly chart for crude oil futures, shows little change in the COT index data, with a very low reading once again, suggesting that we are reaching a turning point for the daily oil price, and it would not be a surprise to see oil prices rising in the near future. The trend of the last three months has been for oil prices to move sideways in a relatively narrow trading range between $35 and $50 per barrel. The longer this trend continues them the more dynamic will be the breakout from this range when it occurs. With OPEC having decided not to cut oil production this week, this could add a bullish sentiment to the market this week, and it would not be a surprise to see a break above %50 per barrel as a result. Whilst the COT index is not a timing tool, it can provide us with a direction, and from the data we have seen in the last few weeks, with the commercial contract holders not selling into the market, we should therefore expect a move higher in due course. You can find the latest daily oil price on the live charts, along with the spot silver price and spot gold prices. In addition an economic calendar is now also available which is updated each day with the main fundamental news.

COT Index Light Sweet Crude Oil - 3rd March 2009

The COT index is still extremely volatile with peaks one week and troughs the next, and with no real direction or indication of a price trend, which in many ways reflects the market at present, with prices consolidating in a relatively narrow trading range in the daily oil price between $35 and $50 per barrel. As you can see from the chart, this week has registered a very low figure approaching zero, and for this to be meaningful we will need to see this confirmed in the index next week, and if so, then this could suggest we are about to see a rise in oil prices in the next few weeks. Clearly we cannot rely on one weeks data to base our trading decisions, but it is an interesting signal for the next period, particularly if the figure from next weeks report is at the same low level. This would suggest that the commercial contract holders have stopped selling futures,  in the expectation that higher prices will follow shortly, so we may be seeing a floor to the current oil price decline from last year. The latest oil prices are now available on the daily oil price live chart, along with an economic calendar, and live news feed.

COT Index Light Sweet Crude Oil - 23rd February 2009

The COT index for light sweet crude oil is still very patchy with no clear trend one way or the other, so it would seem we are due for more sideways movements in daily oil prices for some time yet. The jump in data this week was probably due to the rollover contract periods as we move from one month to another. For trading oil, the chart provides little useful information in  the way of future direction for us at the moment, other than to confirm the present trend as sideways.

COT Index - Weekly Report Crude Oil January 27th 2009

With the index falling, this suggests that the commercial group is expecting crude oil prices to fall further and are therefore stockpiling supplies in the hope of prices rising in the future. For a clear buying signal we need to wait for the index to reach a low of 5-10, before we can expect any significant rise in prices in the short term. If you would like to follow my daily oil prices posts then please just follow the link.

For those of you new to the COT report, it can be a confusing report, both to read, but also to interpret, and in order to try to help you with some of the terms, you will find an explanation of the basic terms and ways to use the data in the navigation bar at the top of the page. As with any set of data, the figures can be ‘sliced and diced’ in many different ways, and there is always a lively debate in the trading forums and among  professional traders, of the benefits or otherwise of the COT data.  Some traders will point to it as a meaningful long term indicator, others will suggest that since the data is delayed, it has very little value. Whoever you believe, or whatever system you develop of your own, there is one fact that cannot be denied. The numbers supplied are accurate, and do provide an insight into the real futures market.

As a commodities and currency trader, I use the COT report in several different ways, and the first point I have to stress is simply this – that in my opinion the COT data does provide a meaningful view of the commodities market, so long as you follow the commercial trading group, but  that for other markets such as currency, then the commercial data has less weight. This is simply my own personal view and you may agree or disagree, but my reasons for having this view are quite straightforward:    Ask yourself this simple question  – ‘in trading in a commodity, who is likely to know more about the market, the balance of supply and demand, the future demand, and any issues which may affect prices in the future ? – the commercial producers, or the non-commercial speculators. In my view I believe that if you are trading in commodities, then the commercial group, will provide a better guide than the speculators, for the simple reason that logically they will have a much better idea of the market and all the pressures affecting prices, from a suppliers perspective, than could a speculator.  The  speculator is there simply to follow the trend, the commercial producer or grower has a physical product to sell, and as an expert in their market, will (in my view ) always be better informed, and therefore have a better view of how prices are likely to move in the future.  So in summary, in my commodities trading, I follow the commercial group, and on a weekly basis I will be providing an update on the various commodities,  starting with gold, silver and oil.

The weekly numbers I use are converted into a COT Index chart which then provides a ratio between 0 and 100, based on the net positions against the net difference of the maximum and minimum for the period. I use a 52 week period, and when the ratio reaches 90 or above, then the commercial group are heavily short compared to the last twelve months, and therefore this indicates that as a group that is essentially selling a product, then they are selling at what they believe are the best prices, and therefore we can intepret this as a likley signal that prices will fall.   Conversley, when the ratio falls to below 10, then the commercial group are not heavily short, and therefore are waiting for higher prices to follow, and will start selling into the rise – in this case we can therefore expect a rise in prices.  So in summary when the indicator is at a high of 90+, then we can expect a price fall in the cash market, and when the indicator is at a low of 5 and below, then we can expect a turn and prices to move higher. The most important point to note is that as a group, the commercials are the only ones physically selling a product, and therefore when they sell, they are looking for the best prices possible. So when they are selling heavily, it is not unreasonable to assume that this is the point at which they feel that prices will not rise further.