Oil Price Analysis for June 28, 2017

Oil prices moved higher on Tuesday for the 4^th consecutive trading session as prices bounced ahead of Wednesday inventory report from the Department of Energy.  The long liquidation that ensued over the prior 2-weeks reduced long position by hedge funds, helping the markets gain neutrality.  Now that hedge funds are out of the market on the long side, there is the chance that better inventory number could help prices rebound.  While it appeared last week that OPEC would attempt to find common ground on deeper cuts to production, it does not seem like the cartel is in any hurry to cut additional market share.

Technicals

Crude oil prices recaptured resistance which is former support near the 10-day moving average at 43.85.  Support is seen near a horizontal trend line that comes in near 41.91.  Momentum is turning positive as the MACD (moving average convergence divergence) index is poised to generated a buy signal. This occurs as the spread (the 12-day exponential moving average minus the 26-day exponential moving average) crosses above the 9-day exponential moving average of the spread. The index moved from negative to positive territory confirming the buy signal. The MACD histogram has an upward trajectory and is pointing to a buy signal for the MACD index.

The RSI (relative strength index) which is a momentum oscillator that measures accelerating and decelerating momentum, moved higher with price action reflecting accelerating positive momentum. The index moved from oversold to neutral territory which is another buy signal, which points to higher prices for crude oil.

Last week, reports circulated that OPEC may be mulling over deeper oil production cuts, but they won’t be rushing to make that decision, even though a panel monitoring the cuts will be meeting next month. Russia is hosting a meeting of five oil ministers from countries supervising the production cut, plus Saudi Arabia in its capacity of OPEC president, on July 24. Although the officials could discuss options to prop up prices and draw down inventories, which may include levying production cuts on currently exempt Libya and Nigeria, OPEC sources do not believe that an outright deeper production cut will be considered soon.

Hedge Funds Folded Their Long Bets

Hedge funds and other major investors appeared to have soured on oil prices, and the pessimistic turn has corresponded with the deep selloff in recent weeks. Since the beginning of June, the long positions in futures and options held by managed money have been liquidated and they have moved to scoop up short bets equivalent to 162 million barrels, almost a record high. The sudden bout of pessimism came after the market concluded that OPEC’s efforts, following the group’s late-May meeting in which it extended the production cuts for another nine months, would be insufficient in balancing the market.

It all adds up to a growing consensus that we may not see a rebound in prices anytime soon. In the near-term, however, the sentiment of hedge funds is very important. Hedge funds are now holding the lowest net-long position in nearly a year, a sign of just how pessimistic they are about oil prices in the short run.

The flip side of this situation is that as investors flock to bearish positions, it sets the market up for a potential rebound. These financial flows tend to snap back in the other direction when the herd takes things too far. This has occurred multiple times over the past year as oil prices enter bullish and bearish phases.

A Weaker Dollar Helps Oil Prices

The EUR/USD surged higher breaking out following comments from the ECB Draghi which hinted at policy adjustment, but pledges caution. Draghi’s comments seem to be the clearest indication from the central bank head yet, that the ECB is heading for a shift in policy parameters. Like at the last council meeting, Draghi sounded more upbeat on growth and repeated that the deflation risk has abated and that reflationary forces are at play. However, as Draghi highlighted, this “more favorable balance of risks has been already reflected” in the ECB’s adjustment to the forward guidance. Draghi still urged prudence in the adjustment of policy parameters and stressed that changes have to be made “gradually, and only when the improving dynamics that justify them appear sufficiently secure”.