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Crude Oil Price Forecast: Producer Hedging May Limit Aggressive Upside

Crude Oil Price Forecast: Producer Hedging May Limit Aggressive Upside

2017-12-05 19:38:00
Tyler Yell, CMT, Currency Strategist
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Talking Points:

  • WTI Crude Oil Technical Strategy: Buying Dips Above $54.85/bbl
  • Producer hedging likely acting as current detractor from post-OPEC extension gains
  • Sentiment Highlight: the ratio of traders short to long at 1.48 to 1, favoring upside

The price of crude oil continues to be lower than the pre-OPEC decision high of $59.08. However, there are emerging signs that reason for optimism remains for the Bulls.

First, reports from OPEC showed that their crude production dipped in November to the lowest level in sixmonths. Developments like this have some investment banks like Goldman Sachs stating the front-month premiums on so-called commodity spreads could continue to signal a likely rise in prices.

An additional signal outside of what you see on the charts that gains may persist is that the while the price has moved sideways around $57 per barrel, likely producer hedging has picked up mightily. As you can imagine, the rationale for producer hedging is that by buying ‘puts,’ sellers can lock in a currently attractive price on oil produced. Producers appear to have been doing this along the rise seen in H2 2017 because the optionality to sell oil at increasing prices can be offloaded if the prices continue to rise and repurchased. Such moves not only ensure the health of their balance sheets, but also that supply will remain steady.

The way hedging is anticipated by producers is through an increase in short positions by swap dealers, which the CFTC data shows. An increase of put positions tends to put selling pressure on the market, which as you can see on the chart, has merely slowed the advance to a sideways move before what could be a nice continuation into the New Year.

The technical picture shows a chart that was once overheating is now catching its breath. There remains little argument for an outright short crude oil position as OPEC production continues to decline and the price trend remains higher.

The price of WTI Crude oil is expected to attract buyers above the dynamic trendline from Ichimoku of $56.47-54.89 (mid-Nov. low) on dips. Initial resistance was expected at the 1.618% Fibonacci extension at 59.08, and that is where price recently paused. A resumption higher above $59.08 would target a move to $62.

Unlock our Q4 forecast to learn what will drive trends for the Euro and the US Dollar through year-end!

WTI Crude Oil is currently trading above the 5-, 8-, and 13-DMAs last week and settled above the 200-WMA for the last two weeks for the first time since mid-2014. Currently, only a break below $56.47-54.89 would open broader concerns of a short-term top, but above this level, buying dips remains the preference.

Chart Watch: Dynamic Support At 56.47 (26-Period Midpoint) Supporting Price Advances

Crude Oil Price Forecast: Producer Hedging May Limit Aggressive Upside

Chart created by Tyler Yell, CMT. Tweet @ForexYell for comments, questions

WTI Crude Oil Insight from IG Client Positioning: ratio of traders short to long at 1.11:1

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

Crude Oil Price Forecast: Producer Hedging May Limit Aggressive Upside

Oil - US Crude: Retail trader data shows 47.5% of traders are net-long with the ratio of traders short to long at 1.11 to 1. In fact, traders have remained net-short since Oct 25 when Oil - US Crude traded near 5205.9; price has moved 11.2% higher since then. The number of traders net-long is 5.9% higher than yesterday and 14.0% higher from last week, while the number of traders net-short is 1.7% lower than yesterday and 15.7% 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. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current Oil - US Crude price trend may soon reverse lower despite the fact traders remain net-short (emphasis added.)

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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Contact and discuss markets with Tyler on Twitter: @ForexYell

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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