The End-Of-Year Trading Week Is Kicking Off With Healthy Gains For Energy Contracts

The end-of-year trading week is kicking off with healthy gains for energy contracts, wiping out Friday’s losses with tensions over shipping lanes seeming to drive the stronger price action with little other news to focus on so far.

Iran appears to have opened a new front in the drone wars, reportedly targeting a tanker ship in the Indian Ocean over the weekend. The location of that attack and Iran’s direct involvement (compared to its indirect support of Hamas and Yemen’s Houthi rebels) suggests it’s possible that the Strait of Hormuz, which is the oil market’s most important shipping lane and a frequent Iranian target, could soon see more disruptive activity. Despite the new geographical escalation, the world’s 2nd largest shipping company is preparing to return ships to the Red Sea thanks to the US Navy and its coalition’s protection.

Can we have a do-over?  After compiling large short positions in oil contracts at the end of a multi-month sell-off, money managers were forced to cover a huge amount of those positions as prices bounced.  The 25-30% reduction in shorts in just 1 week drove a 50% increase in speculative length and the snowball effect of short covering may still be in play this morning. ULSD was the only contract to see a decrease in the net length held by money managers last week as a reduction in long positions was big enough to offset the short covering.

Baker Hughes announced a decline of 3 oil rigs drilling in the US last week, marking a 3rd straight week of declines for oil drilling, while natural gas rigs increased by 1 on the week.  US producers reached record high output last week, even though the number of active oil rigs is down more than 120 (roughly 20%) in the past year as ongoing efficiency gains and a change in the EIA’s accounting methods both seem to be driving stronger-than-expected figures.

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