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Crude Oil Price Analysis for November 21, 2017

By:
David Becker
Published: Nov 20, 2017, 19:15 UTC

Crude oil prices whipsawed initially moving higher on larger than expected increase in long bets on WTI reported on Friday by the CFTC.  Traders then

Crude Oil

Crude oil prices whipsawed initially moving higher on larger than expected increase in long bets on WTI reported on Friday by the CFTC.  Traders then realized that these positions where offset by Short bets on Brent crude which jumped by the most since June last week, signaling the return of uncertainty that OPEC will agree to extend the oil production cut deal it sealed a year ago.

Technicals

Crude oil prices opened higher by closed lower, remaining above support which was the former breakout level of 54.95.  Resistance on crude oil prices is seen near the November highs at 57.92. Prices continue to trade in an upward sloping trend, and until there is a close below 54.95, this should continue to perpetuate. Momentum on the other hand is negative as the MACD (moving average convergence divergence) histogram is printing in the red with a downward sloping trajectory which points to lower prices for crude oil.

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Hedge Funds are Long WTI Short Brent

Hedge fund traders added to long position in futures and options according to the latest commitment of trader’s report released for the date ending November 14. According to the CFTC, managed money increased long position in futures and options by 12.5 contracts while decreasing short position in futures and options by 19K contracts. Open interest that is long outnumbers open interest that is short futures and options by 605%, which was offset by the changes in Brent.

Data from CFTC revealed that hedge funds increased their bearish bets on the international crude benchmark by 8.75 In the week to November 14. At the beginning of this week, however, prices remained relatively unchanged from Friday as traders are wary of making any large bets on either benchmark ahead of the OPEC meeting next week.

Meanwhile, the effect that heightened geopolitical tensions in the Middle East were having on oil prices seems to be subsiding in the absence of any further escalation in hostility. These tensions were one major factor behind the latest price rally, helped by upbeat forecasts about supply and demand. However, last week the International Energy Agency poured cold water on optimistic expectations by revising downwards its oil demand growth forecast for this year and next, sparking the usual worry these revisions cause.

Furthermore, there are reports that Russia may be unwilling to join another deal extension beyond March 2018 as Brent at US$60-65 suits the world’s top producer just fine. That’s on top of continuing growth of production in the U.S. shale patch and forecasts from the IEA that shale oil will rule supreme in the medium term.

Lower Crude Erodes High Yield

An exodus from U.S. high yield debt this past week including mutual funds and ETFs totaled some $4.43 billion according to Bank of America, the third largest drop on record and the biggest decline since August of 2014. The tax status of junk bonds in the pending tax reform legislation remains an open question, while short-dated market yields have continued to rise to trend highs as the Fed slowly removes the punch bowl, in addition to valuation concerns. This has led to some divergence in junk bond returns in November that only recently appeared to be noticed by stock investors.

U.S. QSS Figures Show Gains

The U.S. QSS figures that track activity for the service sector revealed a 5.3% Q3 year over year gain in the aggregate “selected services” measure that undershot the 5.9% rise in Q2. For the larger components, we saw a 6.4% year over year rise in the finance and insurance component, and a 4.4% year over year rise for the healthcare and social assistance component. The components used to calculate the GDP growth figure suggest to us a $2 billion boost in service consumption but no revision for intellectual property investment, and we still expect a Q3 GDP growth boost to 3.5% from 3.0%.

The U.S. Senate deficit hawks are reportedly balking at the ultimate cost of temporary tax cuts likely becoming permanent. Coincidently, a couple of the heel-draggers on the deficit implications are Trump-foes Bob Corker of Tennessee and Jeff Flake of Arizona, adding a political dimension to the debate. The Senate has $1.5 trillion to play with before it needs more than a simple majority to pass the bill and thereby likely requiring Democratic support.

About the Author

David Becker focuses his attention on various consulting and portfolio management activities at Fortuity LLC, where he currently provides oversight for a multimillion-dollar portfolio consisting of commodities, debt, equities, real estate, and more.

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