Bill Moyers had an excellent special last night on PBS regarding the media and its failure to question official statements and do independent reporting in the runup to the Iraq war. I was reminded about the slew of recent stories about the inverted WTI-Brent spread.
In all the the overexcitement about the "broken" WTI contract, reporters from various news services have quoted traders (anonymous, of course) saying that speculators are starting to pull money out of WTI and put it into Brent, as a result of the inverted WTI-Brent spread.
Unfortunately, the reporters seem to have forgotten to look for facts to support such a statement. Exchange and CFTC data are widely available, and would give a clear look at movements in open interest. The first data we could look at is overall relative open interest for Brent and WTI to see if there has been a flow one way or the other.
From Dec 29 through Wednesday, WTI open interest on NYMEX and ICE has risen from 1,636,707 to 1,933,084 contracts -- a 21.1% increase. Looking since Feb 27, when the WTI-Brent spread went negative, the gain is 4.9% or 90,924 contracts. Since the beginning of the year, ICE Brent open interest has risen 111,667 contracts, or 20.4%, and since Feb 27 has gained 74,123 contracts or 12.7%.
So over the past 7 weeks Brent open interest has risen faster than WTI, but the previous 8 weeks it was the other way around. Is it just a periodic flow one way and then the other, or the start of something bigger? While the data hint at some possible shift, it's hardly conclusive evidence.
Looking at non-commercial open interest in WTI futures on NYMEX, between February 27 and April 17 (the most recent data available from the CFTC) non-commercial long positions increased by 28,543 contracts, short positions decreased by 26,233 contracts, and spread positions increased by 29,085 contracts.
As a portion of overall open interest, specs increased their share of long interest from 14% to 15.8%, lowered their short position from 12% to 9.6%, and increased from 16.8% to 18.5% in spreads.
All the CFTC report shows is that speculators' net position in WTI futures moved more to the long side as WTI weakened relative to Brent.
So the real story might be that it is premature to conclude whether or not there is any movement by hedge funds out of WTI as a result of the inverted spread. But that wouldn't make a juicy headline, would it?
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