The Second Mouse Gets the Cheese
Oil Positioning Suggests Investors Running Scared of Trump
There are rare trades out there that I call “The Second Mouse Gets the Cheese.” These trades involve a second chance into a big move. The fundamental picture remains the same or even improved, yet investors are no longer involved because they were run over and killed in the mouse trap the first time. The positioning is cleaner and investors are more scared the second time around, which means the trade works in a classic “wall of worry” as investors have a hard time staying in for the meat of a move.
Most investors threw oil into the “too hard” pile many weeks ago. Between China’s 2Q disappearing act and Trump’s jawboning, the physical market caught out one of the larger net long speculative positions the oil market has seen over the past decade, stopping out tens of billions of speculative length in oil futures and options while mechanical CTAs and other managed money piled into the short side. The setup was among the most convex I have ever seen …and became even more so.
Today’s weekly Commitment of Traders positioning data is eye-opening and reveals the degree to which investors are running scared of Trump and his ability and motivation to destroy the crude market — as if global supply and demand for the world’s largest, most widely traded commodity rest entirely in his hands (yes the North Star still exists, and no I have not changed my mind about any of it since writing it up months ago, so the idea of “TACO” remains absurd to me; he may have started this mess, but the resolution is not up to him).
For context, the latest weekly COT reporting period moved from Tuesday July 14th to July 21st. During that time frame, WTI crude rallied from $79 to $85, while Brent rallied from $85 to $91 (+$6/bbl). Now admittedly this period does not capture the $6-8 leg higher over the past few days, but +7% in the recent reporting period is still a real move, and I expected decent short-covering and a notable increase in net long for speculators.