In this week’s COT report, most major currencies and commodities remain outside of bullish or bearish extremes. Instead, the only position that looks extreme is long crude oil. Over the past week, speculators have added to their long crude positions, and there are now 679,047 futures and options contracts long the commodity. Given the size of the long crude crowd, even a small pullback in crude oil prices can quickly escalate into a rout. This is shown below:

CFTC COT (futures & options combined) – December 26, 2017

Source: CFTC, MarketsNow

Notable extremes are bolded, and are highlighted when speculator positioning is more than two standard deviations above historical trailing 1-year and 3-year trends.

The biggest changes in net positions this week includes rising crude oil and gold positions, and falling Canadian dollar positions. While long British pounds and short Australian dollar positions were at extremes last week, this is no longer the case.

Crowded speculator net positions foreshadow reversals

Looking at crude oil speculator positioning in recent history is particularly enlightening. One can clearly see that the commodity tends to change directions when either bullish or bearish speculator positions become crowded. On January 12, 2016, long crude oil positions dropped to just 195,086 futures and positions contracts. This was 2.1 standard deviations below the previous 12-month average. On that day, WTI crude closed around $30.50. That ended up being pretty close to WTI’s long-term bottom, and the commodity rallied to $50 by the middle of the year.    

Later in the year, long crude oil speculator positions were at a bullish extreme. This time, speculators were long 458,775 futures and options contracts on October 11, 2016. This was 2.3 standard deviations above the previous 12-month average. WTI crude closed around $51 on that day. A few weeks later, crude oil prices fell as low as $43.