The sentiment in the oil market has soured so much over the past two months that investors seem to be reacting to every piece of bearish news, and largely ignoring bullish signs from the industry.
According to analysts, bullish news is on the horizon, but the market will continue to be biased toward news that is negative for crude prices until we see significant global inventory reductions, slower production, and greater demand.
Case in point: last week’s EIA report of a massive 6.3-million-barrel draw in U.S. commercial oil stockpiles spurred a short-lived rally in oil prices. That day, prices settled only slightly higher, despite the fact that the draw reduced crude inventories to 502.9 million barrels, the lowest since January.
The next day, oil prices plunged nearly 3 percent as the number of active oil and gas rigs in the United States rose again in the week to July 7, this time by 12, resuming what was the US shale patch’s impressive run of 23 weeks of steady gains, prior to a decrease of a single rig in the week prior. In addition, OPEC’s exports surged in June, adding further bearishness to the market.
Hedge funds and other money managers increased their net long position in WTI contracts as of July 3, but mostly because of lower shorts, rather than a sharp increase in long positions.
According to data by the U.S. Commodity Futures Trading Commission from last Friday, money managers increased their long positions on WTI on NYMEX by 2,356 in the week to July 3, to 316,447, but short positions declined by 13,988 to 166,496, so the net long position increased.
Money managers increased their net long position in Brent and WTI-linked futures and options by 46 million barrels in the week to July 3, Reuters market analyst John Kemp says.
Money managers had piled up a record number of short positions, amassing 510 million barrels in the major contracts on Brent, WTI, U.S. gasoline, and U.S. heating oil on June 27, John Kemp said last week. That amount of short positions set the stage for a short-covering rally at the end of June.
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In the week leading to July 4, the short positions dropped to 463 million barrels, according to Kemp’s calculations based on regulatory data.
“You didn’t see a lot of long accumulation. It may be an indication that we reached a level where those traders are just willing to take profits,” Citigroup Global Markets analyst Tim Evans told Bloomberg in a phone interview on Friday.
“Sentiment still seems extremely bearish. We’re responding to every bit of bearish news, but we’re ignoring or seeing a limited reaction to any bullish news,” the analyst noted.
Still, analysts are not utter pessimists regarding the oil market.
“Although the fundamentals still aren’t great, most of the possible news is likely to be bullish,” Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts, told Bloomberg. He cited the summer driving season in the U.S., the hurricane season in the Gulf of Mexico approaching, and geopolitical tensions over North Korea, as well as the Qatar-Saudi standoff, as potential upside catalysts.
According to Citigroup’s Evans: “The most common cycle is that major rallies start with short-covering from an oversold condition. That’s an early stage in a bull market.”
However, the market needs to see proof of significantly reduced inventories, higher demand growth, and a production slowdown in order to shake off the negative bias toward bearish reports and shrugging off bullish signs, Rob Haworth, a senior investment strategist at Seattle-based U.S. Bank Wealth Management, told Bloomberg.
Currently, oil price projections are as varied as there are analysts out there. Citigroup’s senior energy analyst Eric Lee expects that crude oil prices could jump to US$60 a barrel by this year’s end thanks to growing demand and lower OPEC supply. Goldman Sachs sees oil prices soon falling below US$40 if there isn’t a sustained drawdown in U.S. crude inventories and rig counts, or without bold action from OPEC.
By Tsvetana Paraskova for Oilprice.com
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