Crude oil speculative positions rise sharply following price fall

The sharp fall in Crude oil has increased interest in the derivatives market with crude contracts and open interest rising on the Multi Commodity Exchange. Despite the sharp fall in prices, volumes have not fallen, indicating that they have, in fact, been rising as well. Apart from crude oil futures, the option market has seen a sharp rise too.

Crude prices in terms of the Indian basket peaked at over $86 per barrel in first week of October and then started falling, initially on reports that US would relax Iran sanctions. This ultimately did happen and India and some countries were allowed to lift Iran oil for some time. During this time, bulls started covering positions and booked profit, resulting in a rise in volumes and trades.

Crude oil has declined sharply in recent sessions. Though the US sanctions on Iran came into effect on November 4, waivers were granted to eight countries to continue to buy oil from Iran for six months.

Sources said that when reports of higher inventories started coming in, crude started falling further and bearish positions were generated globally and in India as well. This again helped increas,e volumes on MCX, a major exchange in India for trading in the commodity. However the volume increase is around 15 per cent only because prices have fallen by around 30 per cent.

Further, US crude oil production is expected to touch a new record high of 12 million bpd in 2019. So, once again the issue of global supply glut has resurfaced. Opec production rose to 32.90 million barrels a day in October, from 32.77 million barrels the month prior. US crude oil production continues to increase rapidly. The IEA has warned that global oil supply will outpace demand throughout 2019.

However, open interest or speculative positions have increased 2.57 per cent the past one month on MCX. Bears were building short positions for over a month, but now analysts who track commodity derivatives say that further short building has now slowed down.

Naveen Mathur, Director, Commodities and Currencies, Anand Rathi securities, says, “The recent dramatic fall in crude oil prices was not a speculative move as indicated by the higher volume and open interest. When prices started to move lower, open interest picked up fast and volume followed shortly after.”

While prices have fallen significantly in the short term, reports of slowing global growth and the likelihood of Opec cutting output in its December 6 meeting are not allowing prices to recover.

The US-China trade war has led to concerns crude demand would be impacted. Geo-political tension has added to the risk. Mathur says, “A trend (of subdued prices) is likely because more investors support current price movements. With every fall in crude prices, both the OI and volumes are rising sharply. There is still no sign of reversal in the ongoing trend.”

On MCX, however, Crude options have picked up. Last May, 31,275 lots were traded in options. This rose to 80,458 in November while total monthly volume has increased from Rs 15.19 billion in May to Rs 35.43 billion in November.