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A tried and true way to make money on the oil market's volatility is to buy crude when the money management community is extremely bearish. This can be closely traced by watching positioning in the futures, or derivative, market.
[Chart: Kemp — money-manager net position in oil futures]
The key element of the above chart is the red line. This displays the net position of money managers with oil futures contracts. In reality, it mostly reflects the status of hedge funds which tend to be far more active in the futures market than traditional investment advisors and/or portfolio managers.
Regardless, it's been consistently rewarding to move in an opposite direction to what this cohort has been doing. It's a classic case of following Warren Buffett's dictum to "be greedy when others are fearful, and fearful when others are greedy."
As you can see, other than the late summer of 2024, this is as net-short as money managers have been over the last five years. Remarkably, that includes the oil demand collapse during Covid when the futures prices went deeply negative due to a lack of storage and a massive inventory overhang.
Buying oil then would have produced a gain in excess of 100% over the next year, even based on the physical price of crude which never went negative (it bottomed just under $20 in April 2020).
More recently, going long oil when this reading was at its low in September 2024 would have generated a 26% return in under six months. Even buying crude when positioning was roughly comparable to the current status (i.e., before the price and positioning hit bottom) would have produced a 10% gain in about half a year. (It was the strong rally into the start of this year that caused Team Haymaker to suggest some profit-taking on crude and oil-related shares.)
As usual, dollar-cost-averaging into oil when bearishness has been intense was the best approach. The same is likely today, at least for long-term-focused investors. Traders may want to wait for stabilization. On that score, the jury is out if today's powerful rally is marking a turn in the brutal downtrend that began in January and has seen oil fall by almost 30%. What is clear is that oil inventories remain low on a global basis, as well as in the U.S.
David "The Haymaker" Hay