Oil Price Fundamental Daily Forecast – Hedge Funds Could Trigger Sharp Liquidation-Driven Reversal

U.S. West Texas Intermediate and international-benchmark Brent crude oil futures declined on Monday in reaction to the news that U.S. shale drillers added more rigs last week. Additionally, some of the optimism over the extension of the deal to curb production may have worn off especially since many traders believe the news had been fully-priced into the market.

The selling pressure is continuing on Tuesday with both the WTI and Brent futures contracts threatening to change their respective trends to down on increasing concerns over U.S. production.

At 1204 GMT, January WTI crude oil is trading at $57.16, down $0.31 or -054%. The trend will change to down on the daily chart on a move through $56.75. February Brent crude oil is trading $62.28, down $0.17 or -0.27%.

Traders are worried that rising prices will lead to a significant jump in U.S. production. For example, higher prices in September may have helped drive production to nearly 9.5 million barrels per day in September.

Some are saying that if WTI crude can sustain a rally over $60 then this could easily push U.S. production over the 10 million barrel per day mark, increasing the non-OPEC forecast and capping further attempts to push prices higher.

Late Tuesday at 2130 GMT, the American Petroleum Institute’s weekly inventories report is expected to show crude stocks fell by 3.5 million barrels. This could limit the selling pressure today.

I think the direction of the crude oil market over the near-term will be determined by hedge fund activity. They are holding massive long positions, having raised their bullish position in crude oil and refined products by another 63 million barrels to a record 1,155 million barrels in the week before the OPEC meeting.

The hedge funds have two choices, buy strength or buy a dip. I don’t think there is enough bullish news at this time to encourage the buying of strength so I expect a pullback into support. What the hedge funds have to do is avoid triggering a sharp liquidation-driven reversal to the downside.