Here is a plot of price as of Tuesday each week vs US Production+Unaccounted for Oil.  I add Unaccounted for Oil to US Production to get a little clearer picture, a little sooner of what US producers are doing since EIA estimates weekly production.

It gives me a little concern for the bullish case since production has risen slightly recently.  I was surprised that a move to $50 had such a dramatic and lasting affect on US production.  I was fully expecting a drop below 9MM bbl/day.  That said, given the strong floor that seems to be established in the $42.50-$44 range by large traders/professional money, it is my belief that producers likely hedged their September-November output knowing a seasonal downturn in price was likely triggered by the refinery switch over for winter.

So now the game is for US production to fall making room for Iranian oil which will hit early 2016.  It is also by belief that the Saudis would like to pick up another 500k-1MM bbl per day of exports to the US, so oil prices could be capped in the $50s for awhile until US producers make room for more OPEC oil.

A lot of hedges some placed last year in the $80s and $90s along with new ones this summer in the $60s will be rapidly expiring in coming weeks and months.  That is likely to have dramatic impact on US production.

The COT report from my previous report indicates managed money may be slightly ahead of the big move up in price, yet this divergence still indicates price is likely to make a significant upward surge.  If it becomes obvious US production is falling, that surge will materialize.

In other words this trader is very cautious about shorting.  Really I only like to short when price hits $50, but I have been known to take out shorts at lower prices.  But I am a big time buyer in the $43 area.  I've lowered by UWTI target from $10 to $9 and even was able to pick some up this week at $8.25.  I'm buying USO via put options around $14-$14.50.  But I sell on each surge.

What I was looking for was a leading indicator.  I found that in the swap dealers, the yellow line.  This means the indicator needs to move opposite of price and reach an extreme indicating a reversal in price is imminent.  Reversal of the indicator confirms the price move is real.

Some would ask why not just follow the managed money, the gray line.  That is because it slightly lags price and more or less follows price.  When the amount of bullish managed money flattened out at the top this past summer, it was an indicator that a reversal was possible as well,

Note the late August peak in Swap Dealer bullishness has been surpassed.  This was likely caused when price surged passed $50 and producers opened a lot of hedges.  Total short positions for both the Producer/Merchant/Processor and Swap Dealer groups surged.  This has also led to an increase in US Production+Unaccounted for Oil.  I'd like to see the total short positions for the physical and swap dealer groups drop back to the levels that were seen on the March and August spikes.  Until then I will be somewhat nervous that $42.50 could break, retesting $37.75.  But history indicates that if price stays in the low $40s and certainly if it moves below $40, we will see a massive falloff in US Production+Unaccounted.

Mid summer produced a 5% production+Unaccounted drop as producers hedges expired.  It is my belief we will see a repeat as the latest block of producer hedges expire.