Originally published by AxiTrader
Earlier this month the price of crude oil made what looks like a spike low on the back of a pessimistic crescendo.
That pessimism and collapse in sentiment as traders focussed on the uplift in US oil production and a perceived lack of traction of OPEC's production cuts saw WTI trade down to a low of $43.74.
Since then however, it has bounced nicely and is opening the week around $47.80/90 this morning. That's above the important support zone of $47.00/20 but well below the recent peak up near $54 a barrel.
With the upcoming OPEC meeting on May 25th largely expected to extend the production cut agreement for another 6 months, it's worth looking at what the charts show and how positioning is as we head toward that meeting.
The first thing to note is that positioning and prices have been moving in close proximity for the last 18 months. That's not an extraordinary notion because in many markets positioning and price often have a strong correlation.
But what is interesting from a positioning perspective is that from a peak of around 525,000 net longs for the big speculators at the end of February positioning has now fallen back to what might be considered a more "normal" 328,000 as at last Tuesday according to CFTC data released Friday night.
I say more normal because 305,000 has been the average (mean) net long positions the big speculators have carried since January 2015.
So oil is back in that zone now.
That we are back near average in the run up to the next OPEC meeting on May 25 is a tantalising prospect which could fuel the next big move in crude oil prices depending on the outcome of the OPEC meeting.
It's fair to say a number of things are pretty much baked into market prices at the moment.
They include the fact that OPEC will extend the production cut of 1.8 million barrels (when non-OPEC output cuts of 600,000 bpd are included) for another six months, that US shale oil production increases relative to where the market and OPEC thought they were are on track to nullify the non-OPEC cuts.
Equally though the approximately 13 million draw in US inventories over the past month or so shows that the cuts may indeed be gaining traction and causing the very rebalancing OPEC wants and suggests is occurring.
At present then we have prices sitting just below $48 a barrel in WTI terms and $51 a barrel in Brent crude terms. Coincidentally the average - based on weekly resets - price of WTI for the past year has been $48.73.
Thus again we have market prices, and positioning, in the vicinity or medium term (1-2 year) averages. So is it any wonder a chart of WTI or Brent crude looks messy right now.
For me two things are key.
First, do we continue to see the big draws in US crude inventories we have seen in recent weeks. And crucially, does the demand for and moves in gasoline inventories support said draws in crude oil should they occur.
Second is whether OPEC can pull a rabbit out of the hat and somehow surprise markets with either deeper cuts or an extension beyond 6 months.
Ultimately though this is about supply and demand so inventory data is going to be key.
Looking at the chart and the spike low looks obvious but the strength of the bounce may be fading a little. My system is now 50% long and there is solid resistance in the $48.70/$49.00 region where I'll exit completely if we get there.
Here's the chart:
Have a great day's trading.