The Doha meeting turned out to be a complete wash, but still, the rumour and expectation leading up to the meeting produced a massive rebound in oil prices. And while logic says that the markets should now crash because Doha failed to give us an output freeze, logic doesn't typically rule this roost.
A downtrend ends when the bearish traders believe that the stock/commodity will not fall further and they rush to close their shorts, locking in their profits. Simultaneously, the bullish traders build long positions, believing that the prices are attractive and a rebound is possible.
However, the pullback converts into a new uptrend only when traders buy every dip and continue buying at higher levels-or else the rally peters out and a trading range is formed.
The money managers are believed to be the smart money. The direction of their bets provides important insights on the future of the markets. Related: Forget Doha. The Fundamentals Are Moving In The Right Direction
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The chart shows that the net-long position by the money managers is close to the highs of the past nine months, and the positions have more than doubled since the start of the year. Related: Oil Prices Up On Weaker Dollar, Declining Production
The CFTC data shows an addition of 20,857 net-long positions in WTI crude oil for the week ending April 12, 2016. The total net-long position is 215,630 contracts.
On closer scrutiny, one finds that the net-long positions increased due to short covering rather than the addition of new longs. The short positions decreased by 18 percent, whereas, new longs only increased by 0.8 percent.
This indicates that the traders are not confident that the markets will move a lot higher from the current levels. Hence, they haven't formed new long positions, but they believe that the worst for the markets is over, therefore they have closed outstanding short positions.
The smart money has continuously increased their bullish bets since the Doha meeting was announced. The traders believed that the Doha meeting was the first step in rationalizing the demand and supply situation, but Doha was a non-event.
So, is the crude oil rally over? No.
Very few experts expected the Doha meeting to end in a path-breaking agreement between the OPEC nations and Russia. The consensus predicted a freeze at January levels. The meeting was never expected to alter the demand and supply fundamentals in any way. Related: Oil Back On Track As Markets Dismiss Doha
Then why did crude prices rise by more than 50 percent?
Crude plunged to a 12-year low, leaving the markets deeply oversold and due for a bounce. The traders bought the Doha rumour and closed their short positions, pocketing huge profits.
Any addition of fresh long or short positions as indicated by the forthcoming CFTC reports will provide insight into crude's next move.
If traders show an inclination to build long positions, crude should move towards $50/b. On a build-up in short positions, oil should fall to $32-$35/b.
But if the net positions do not change materially, it is an indication that the buyers and sellers don't consider the current level to be either over or undervalued. It will lead to a lull and crude will continue to trade in a tight range, until the fundamentals sort out and the traders are clear about the next move.
By Rakesh Upadhyay for Oilprice.com
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Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm. More
Comments
It won't take too many years before all the surplus capacity is absorbed. The low prices of today will have prevented sufficient oil exploration and investment to allow the amount of oil produced to keep up with increasing future demand. Since commodities are priced at the margin, the price of oil will spike. My guess is that it will happen within 4 or 5 years. The longer prices stay depressed, the higher the coming price spike will be. If we could keep increasing oil production for another 25 years, we might avoid the coming economic crisis. We might then have time to electrify enough transportation to not be critically dependent on oil to move goods.
So what crisis will we face? I see two possible routes to the coming economic collapse. Keep in mind that the global economy is very weak. Interest rates wouldn't be negative anywhere, if we weren't in serious economic trouble. When measured against economic output, the level of debts is at a record high, with trillions more debt having been created since the 2008 economic crisis.
If you pull up a graph of historic oil production, you will see that it is almost always increasing. That makes sense, since it takes more energy to do more work. Since oil moves nearly everything, what will happen when less oil is available? Less stuff will get moved. Under such circumstances, the economy of the world must shrink. It is physics. Some people think that oil energy can be replaced by gas, or battery power. Yes it could, if we had 30 or 40 more years to make the switch, but we don't have nearly that long.
A shrinking economy is the definition of a recession. With interest rates at zero, and debt at record levels, stopping any recession, caused by less oil on the market, from becoming a downward spiral into a depression, will take a miracle. I doubt it is possible.
Or the oil price spike could cause the same thing to happen by acting like a giant tax increase, causing a recession. Either way, we are probably screwed.
Watch for governments to try all kinds of strange ways to try and avert the collapse. Expect massive money creation, checks deposited into your bank account, an explosion in public spending, and possible hyperinflation. Nothing will work, because the banking system is designed to function in an economy which is nearly always expanding. It won't survive for very long in an economy shrinking for lack of energy to do work. Without functioning banks, nothing works. Civilization collapses within days. That is why less oil will be a problem.