Brent recently hit $80 per barrel, which ushered in a flood of predictions for when we might hit $100 per barrel. But Saudi Arabia and Russia just crushed those dreams, with reports suggesting that the two top oil producers could move to allow higher levels of output at the upcoming meeting in Vienna on June 22.
Assuming they do indeed lift output levels, does that mean that the rally is over? Are we in for a sharper price correction? It’s possible. But it’s also possible the market is overreacting. Let me explain.
On the one hand, there is ample evidence that the oil price rally was sentiment driven. Brent prices have rallied nearly 90 percent since bottoming out at $45 per barrel nearly a year ago. The steady climb in prices occurred alongside a record buildup in net-long positioning by hedge funds and other money managers.
Of course, the underlying fundamentals indicate that the market tightened significantly, but record bullish positioning began to look overstretched earlier this year. In fact, some savvy investors started booking profits, selling out of their positions in April. Brent has edged up over the month of May, even as the speculative net-length in the ICE Brent futures market fell back significantly.
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In other words, the smart money was already starting to bet against higher oil prices even as geopolitical fears spread like wildfire over the past month. Speaking of which, much of the premium…