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The Long and the Short of it - COT Reporting

Natural gas futures surged over 12 percent on Thursday to close at  $2.49/MMbtu following an unexpectedly bullish EIA storage report. Analysts interpreted the storage numbers as evidence that coal to gas switching in the power market has not yet reversed as we enter the summer peaking season.  The next market report to hit trader’s desks after the EIA storage numbers is the Commodity Futures Trading Commission (CFTC) Commitment of Traders (COT) analysis released later today (Friday). In today’s blog “The Long and Short of It – COT Reporting” Sandy Fielden takes a deeper look at the value of the COT report.

Everyone who has ever taken a Futures 101 class knows that futures exchanges offer a liquid and regulated trading marketplace for the exchange of price risk between commercial market participants with a desire to hedge and speculators with a desire to bet on prices.

In the United States, the federal government in the guise of the CFTC regulates futures exchanges. These guys are the market cops and in theory they make sure that trading doesn’t descend into daylight robbery every day. One of the ways that the CFTC keeps track of what’s going on is through monitoring open interest.

Open Interest

Open interest is the total of all futures contracts entered into and not yet offset by a transaction, by delivery, by exercise, etc. The aggregate of all long open interest is equal to the aggregate of all short open interest. The chart below shows daily NYMEX natural gas total open interest (for all contracts) in red against the left axis and nearby NYMEX natural gas settlement prices against the right axis. You can see in the chart that there is a general relationship between total open interest and prices because significant price rallies and falls tend to be accompanied by increases in market participation (i.e. open interest). Open interest by itself, however, does not tell us a great deal.

Commitment of Traders

The really interesting data from the CFTC comes in the Commitment of Traders (COT) report that they publish every Friday at 15:30 Eastern Time. The COT report picks apart the open interest data to provide more insight into how speculators and hedgers have placed their bets in the futures markets as of the previous Tuesday.

Although they only publish the COT report weekly, the CFTC cops monitor trader positions on the exchanges every day. Futures broker reporting firms file daily reports that show the positions of traders above specific reporting levels set by CFTC regulations. The information in the daily reports enables the Commission to track the positions of individual traders or classes in real-time and considerable detail, identifying unusual trading patterns or the accumulation of positions. If these guys call you up, you might need a lawyer.

The traders reporting to the CFTC are pigeon holed into a number of categories, depending on their position in the market. These categories have changed over time and they vary by commodity. However since 2009 the CFTC categories for natural gas futures consist of four major groups:

1. Producers/merchants/processors/end users – A.K.A. commercial hedgers

2. Swap dealers

3. Managed money

4 Other

In general, the groups that are of interest to analysts are the first group that represents commercial hedgers and the second and third groups that are financial players generally grouped under the speculator umbrella.

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