Fundamental Forecast for USOIL: Bullish
- Institutions and levered funds loading into Crude Oil, open interest gains most since 2002
- Strong trend shows struggles around $64.65 (Brent), $58 (TWI)
- Per BHI, U.S. Oil Rig Count Climbs 9 to 738, biggest weekly increase since late June
- IGCS showing increase in retail short WTI oil positions w/w, contrarian view favors push higher
Who is bold enough to be short oil in the aftermath of the Saudi corruption purge that surfaced last weekend? That is a question with an answer that appears to come up with few names. Despite ending last week in an overbought zone per the five-period Relative Strength Index, a technical measure of the velocity of a market’s price action.
Despite aggressive production out of the US, the price of oil has risen nearly 35% from the low seen in late June, and many feel that the development is justified. While production is higher, there continues to be a decline of active rigs in the US helping to bolster bullish views in the long-term. Additionally, it appears that a derivative of the corruption purge could lead to a higher probability that an OPEC+ (a moniker of OPEC and strategic alliances) agreement to extend the curb of oil production will extend to the end of 2018.
A key way to see a supportive market is through the Brent Curves that show where price is expected to be at a premium compared to later months. This trend is known as backwardation and shows implied tightening in the physical market through 2018, which could support price.
Traders should caution that a penned-OPEC deal would lead to an aggressive rise in price. The market is a discounting mechanism and looking at institutional positioning, which ICE Brent Crude weekly Commitment of Traders report shows us is sitting at record levels, any disappointing news may drop prices more than the positive news would lift prices. While we could see a development of buy-the-rumor-sell-the-news, the selling is likely to stop at a higher level as the fundamentals of the trend appear strong. On the other hand, options markets are showing interest exploding with bets that payoff if Brent Crude hits $80 before year-end.
There’s a global rise in oil demand! Click here to see our Q4 forecast on what outcomes we're watching!
Now, on to the charts. Earlier, we mentioned the positioning that is set to take advantage of a further rise in prices. Recently, the price has struggled to break above $58, the highest level since June ’15. Beyond $57.92, this week’s high, traders should look to the 2015 high of $62.58. A breakdown of price would likely first find support at the prior 2017 high ($55.18) followed by the September high ($52.86.) A hold and reversal higher from here would turn sights back to the 1.618% extension at $59.08 where a close below $52.86 could see a test of the October low at $49.10.
Crude Oil price expected to hold above $54-53 polarity zone, upside focus for WTI at $59.08
Chart Created by Tyler Yell, CMT
Next Week’s Data Points That May Affect Energy Markets:
The fundamental focal points for the energy market next week:
- Monday 6:00 AM ET: OPEC issues monthly market report
- Tuesday 4:00 AM ET: IEA monthly oil market report and annual World Energy Outlook 2017 with longer term forecasts
- Wednesday 10:30 AM ET: EIA weekly US Oil Inventory Report
- Fridays 1:00 PM ET: Baker-Hughes Rig Count at
- Friday 3:30 PM ET: Release of the CFTC weekly commitments of traders report on U.S. futures, options contracts
Crude Oil IG Client Sentiment Highlight: Contrarian view of retail positioning favors upside
Oil - US Crude: Retail trader data shows 39.4% of traders are net-long with the ratio of traders short to long at 1.54 to 1. In fact, traders have remained net-short since Oct 25 when Oil - US Crude traded near 5214.9; price has moved 10.0% higher since then. The number of traders net-long is 1.6% higher than yesterday and 9.7% higher from last week, while the number of traders net-short is 4.8% higher than yesterday and 9.7% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil - US Crude prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed Oil - US Crude trading bias (emphasis added).