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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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U.S. Crude Oil Could Be Ripe for A Short Squeeze

  • Crude oil inventories at Cushing have dropped to their lowest level for this time of year in over a decade.
  • The depleting stocks at Cushing and the bearish sentiment on the oil market, especially the recent more negative positioning in WTI Crude, could lead to high prices in the near term.
  • In the three weeks to January 19, inventories at Cushing fell by more than 5 million barrels.
U.S. Crude Oil Could Be Ripe for A Short Squeeze

Crude oil inventories at Cushing have dropped to their lowest level for this time of year in over a decade, suggesting that a short squeeze could be coming for the bearish portfolio managers who have amassed a lot of short positions in U.S. crude oil futures.

The falling stocks at the hub providing the physical delivery mechanism for the NYMEX WTI futures contract may have already started to unnerve traders who had turned extremely bearish on U.S. WTI Crude by the middle of January.    

But in the latest reporting week to January 23, money managers bought a lot of WTI contracts and liquidated a lot of shorts, slashing their bearish bets on WTI by the most in nine months.

The depleting stocks at Cushing and the bearish sentiment on the oil market, especially the recent more negative positioning in WTI Crude, could lead to high prices in the near term, Reuters market analyst John Kemp argues. 

In the week to January 19, crude oil stocks at Cushing – the designated delivery point for NYMEX crude oil futures contracts – fell to just 30.1 million barrels, down by 2 million barrels from the previous week, and down by 15.8% from one year ago, data from the latest EIA inventory report showed.

The level of Cushing stocks was at its lowest for this time of year in over a decade, Reuters’ Kemp notes.

In the three weeks to January 19, inventories at Cushing fell by more than 5 million barrels, as EIA’s weekly petroleum status reports have shown consistently throughout this month.

At the same time, as of January 16, traders continued to sell West Texas Intermediate futures in anticipation of further strong production growth. Hedge funds and other institutional traders sold the equivalent of 24 million barrels of U.S. crude in the week to January 16, Kemp reported last week. This compared with buying in Brent Crude, the international benchmark, equivalent to 18 million barrels, Kemp noted about the data compiled from the exchanges.

However, the latest traders’ commitments data, comprising the following week to January 23, showed a reversal of the bearish sentiment in U.S. crude futures.

Money managers slashed their short positions in WTI by a massive 33,649 lots, per the latest data compiled by Saxo Bank’s Head of Commodity Strategy Ole Hansen.

The gross short was 78,598 lots after the largest cut in shorts since April 2023.

At the same, hedge funds and other money managers boosted their longs, and the net long position – the difference between bullish and bearish bets – jumped by 49% to 134,140 lots— the highest in 11 weeks.

The long-to-short ratio was 2.7:1, up from just 1.26:1 as of January 16—a sign that traders have moved to slash a lot of their bearish bets.

WTI Crude was the best-performing commodity last week, receiving a boost from the technical break above $75.50, and $80.50 in Brent, Saxo Bank’s Hansen wrote in a weekly commodity report on Friday.

The move forced investors “to rethink a strategy which for several weeks had seen them switch their long exposure to Brent away from WTI in the belief that production growth will continue to pressure prices in the United States while conflict in the Middle East will provide some support for prices in Europe and Asia.”

However, the low Cushing inventories and the slashed shorts in the most recent reporting week to January 23 suggest that a short squeeze in the U.S. WTI crude futures may have already begun.

Still, oil prices are not expected to rally much above current levels, according to Saxo Bank.

“We maintain the view that, unless a serious supply disruption occurs in the Middle East, both WTI and Brent will likely remain range bound around $75 in WTI and $80 in Brent with no single trigger being strong enough to change the dynamics of a market that has divided its focus between growth worries, not least in China and the USA, as well as rising non-OPEC+ production on one hand and OPEC+ cuts and geopolitical risks on the other,” Hansen wrote.  

By Tsvetana Paraskova for Oilprice.com

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Leave a comment
  • George Doolittle on January 29 2024 said:
    Very peculiar weather has absolutely hammered us natural gas prices which in having such low prices remains a massive growth driver for the US economy as does the further build out of Wind Power 2.0 still the US oil markets remain a forever mystery to me as it being so global and US Dollar based now more than ever I would think there would be a flood of imports into the USA to take advantage of these high prices. Those who have stuck with the US coal industry have in fact been the big energy winner of the past few Years as that is even cheaper and more reliable than both natural gas and wind power. Still has had zero deleterious impact on oil prices still of much consequence anyways. Actual oil demand for the USA distillate fuels market still remains very stable going on many Years now. Tesla stopped crashing today anyways. I still think US monetary authorities will move heaven and earth to get interest rates back to 2.00% tho this despite a truly Awesome Glut of Everything still flooding into the USA from China and now Europe to try and retail in some way. The entire World seems starved for energy at the moment whereas the USA is more along the lines of "paying the price" in becoming an oil Super State(s.) I can definitely see why so many immigrants are desperate to get into the USA still as a consequence. Texas is really really really rich at the moment no doubt about that.

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