Crude Oil Price Update – Balance of Price Risks Has Shifted to DownsideLast week’s price action and the position’s data indicate that the hedge funds are accumulating but not chasing crude oil higher. This suggests that although they are bullish, they are more interested in buying value rather than inflated, event driven prices.
U.S. West Texas Intermediate and international-benchmark Brent crude oil futures are edging higher after a weak attempt to take out last week’s lows failed to attract enough sellers to sustain the move. Some traders are citing a government report showing only modest hedge fund buying as one of the reasons for today’s tentative trade.
Hedge Funds Sitting Tight
According to Reuters, the increase in tensions across the Middle East after the killing of an Iranian general by a U.S. air strike, hedge fund managers added only modestly to their bullish position in petroleum last week.
Hedge funds have gambled heavily on an oil price recovery this year, pricing in accelerating global growth, restrictive output policy by Saudi Arabia and continued tension short of war between the United States and Iran.
As a result, the potential to add further bullish positions is more limited than a couple of months ago and prices are vulnerable to a sharp correction if growth disappoints or the threat of open conflict diminishes.
U.S. Commodity Futures Trading Commission and ICE Futures Europe Position Reports
Hedge funds and other money managers increased their bullish position in the six most important petroleum futures and options contracts by only 19 million barrels in the week to January 7.
Bullish positions increased by the smallest amount for five weeks, according to CFTC and ICE position records.
On the eve of the air strike that killed Qassem Soleimani had already amassed a large bullish position in crude and refined fuels such as gasoline and diesel, which may have discouraged further buying. Moreover, the crisis that erupted on January 3 already appeared to be contained by January 7, probably contributing to the limited rise in bullish positions evident in the weekly records.
Last week’s price action and the position’s data indicate that the hedge funds are accumulating but not chasing crude oil higher. This suggests that although they are bullish, they are more interested in buying value rather than inflated, event driven prices.
From a positioning perspective, the balance of price risks has shifted to the downside, with funds already holding a lot of bullish positions and vulnerable to disappointing economic news or any easing of tensions around the Gulf.
Barring any major flare-ups in the Middle East, we still contend that March WTI crude oil is likely to trade $57.79 to $55.99 over the near-term.