We discussed the growing imbalance in the unleaded gasoline market last week here at Equities.com. Our primary focus was based on two points. First, the fundamentals in the petroleum sector are bearish. Secondly, the commercial traders as a group have now turned negative on their own product at these prices. These two factors have grown in strength over the last week and Monday's weakness finally triggered an official COT Sell signal.
U.S. crude oil production has continued to expand in spite of declining prices and rig counts. The Energy Information Administration (EIA) announced a 42-year high of 9.285 million barrels per day. Furthermore, OPEC production, particularly Saudi Arabian production continues to climb as well. They are clearly using their cost of production advantage to maintain market share by driving out higher priced fracking rigs here in the U.S. In fact, Saudi production is sitting just below its record production high of 10 million barrels per day set in 2013. Clearly, the near-term fundamental news is increasingly negative.
Elaborating on the second point regarding the commercial trader position, they've sold another 6,500 contracts in the last week. Their recent selling of more than 16,000 contracts in the last three weeks is the most concerted action that commercial traders have taken in nearly a year.
Moving to the actual COT Sell signal, the recent run up in prices only served to push short-term market momentum above our overbought threshold thus, cocking the trigger for a short trade. As mentioned earlier, Monday's weakness brought the market back below our overbought threshold to trigger the signal. We will now use Friday's high just shy of $2 at $1.9893 in the April contract for our protective stop point.
For more background on this trade, please see last week's setup, "Bucking the Seasonal Gasoline Trend" as published at Equities.com.
