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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Oil Speculators Run Out Of Reasons To Bet On Rising Prices

Oil prices plunged to their lowest levels in a month on April 4, falling back from recent highs to the mid-$30s per barrel.

Oil traded down on the sinking prospect of an outcome from the Doha summit on April 17, where several key OPEC countries will meet with Russia to discuss the pending production freeze agreement. Optimism faded on the deal, following remarks from Saudi Deputy Crown Prince Mohammed bin Salman, who said in a wide-ranging interview with Bloomberg that Saudi Arabia would only agree to freeze its production levels if Iran also participated.

That was never going to happen though, with Iran finally free of western sanctions and looking to ramp up production by 1 million barrels per day (mb/d) over the next year or two. Iran’s oil minister announced this week that Iran is well on its way to that goal, having increased oil and condensate exports by more than 250,000 barrels per day in March. That figure is likely exaggerated, but the trend is clear. Related: Advantage U.S. In The Global Petroleum Showdown?

More than a few writers at Oilprice.com warned over the past two months that the OPEC-Russia “freeze deal” would not amount to much. It has been relatively clear since the start that the major countries involved – Saudi Arabia, Russia, Qatar, Venezuela – except for the Saudis, have limited ability to increase production even if they wanted to. The oil markets seemed to ignore that fact, and oil prices surged by 50 percent between early February and late March.

Along the way, oil speculators took incredibly bullish bets on oil, bidding up prices as they closed out their short positions. Over a seven-week stretch, oil traders posted the largest liquidation of shorts on record. In that sense, the rally was driven largely by sentiment, less so by fundamentals. Oil still remains oversupplied, with global production exceeding demand by some 1.5 mb/d. Crude oil storage levels continue to climb, once again hitting a fresh record in the last week of March to reach 534 million barrels. Oil traders struggled to find a new reason to keep oil above $40 per barrel. U.S. Federal Reserve Chair Janet Yellen provided a small reason to keep oil afloat last week when she seemed to back off previous commitments to raise interest rates multiple times this year. Related: Unfolding The World’s Biggest Oil Bribery Scandal

But with the fundamentals not improving for the oil markets, prices increasingly looked detached from reality. And with speculation having been the key driver of the latest rally, the more than $40 price levels seemed to be unsustainable. Indeed, last week spot prices began to fall. The comments from Saudi Deputy Crown was the catalyst to what could be an unfolding sell off, puncturing the positive sentiment that had built up in recent weeks. WTI closed out on April 4 down 4 percent, hitting its lowest level since early March.

The renewed bearish sentiment is evident in the trading data. For the week ending on March 29, net-short positions rose by the most since November, according to CFTC data, jumping by 11,167 contracts, or 17 percent. Net-long positions fell by 6.3 percent. “We switched to a moderate flow of selling by money managers,” Tim Evans, an energy analyst with Citi Futures Perspective, told Bloomberg. “It was dominated by new shorts coming into the market and not by long liquidation. The rise in shorts may reflect that they think the rally is done." Related: $120 Oil As Soon As 2018?

A trend towards more bearish bets could be coming soon. “Speculative financial investors who had bet on a rising oil price in anticipation of an agreement…are likely to withdraw again in view of this latest situation,” Commerzbank wrote in a note to clients.

To be sure, over the long-term oil prices are unsustainably low, with so many drillers not turning a profit right now. Oil production is falling in the U.S., in Latin America, and in some OPEC countries. Prices will have to rise. But there is still some ways to go. Until then, the sharp rallies in prices could be followed by sell offs, with the one consistency being volatility.

By Nick Cunningham of Oilprice.com

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Leave a comment
  • Kr55 on April 05 2016 said:
    Looks like API gave them a reason today. Shall see is EIA is in line tomorrow.
  • Milt on April 05 2016 said:
    API draw of 4 mill. Excess each day is 2.2 mill.
    OPEC greed and profligate spending has undone them. They must keep pumping to even stay alive. The global econs are weak and cannot soak up the glut as quickly as they pray to Allah it can. Down is the only direction.
  • Viola Perry on April 06 2016 said:
    Why are speculators driving up the prices anyway? The price is determined what the market will accept and we do not need speculators in this game ripping off the people while they suffer no minimum wage increases, cut hours, etc. Why did the oil companies not save up for the rainy day when they were getting $ $4.50 per gallon for no reason whatsoever. Diesel is cheaper to make and therefore was always cheaper than gas but these days Diesel is higher than gasoline. What do they think, they can get away with just anything?

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