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James Hyerczyk
WTi and Brent Crude Oil

Other than several days of sideways trading, which suggested impending volatility, there was nothing in the stars at the start of the week that indicated the market was setting up for a nearly 10% weekly gain.

The week started with the news that hedge funds sold crude oil and refined products at the fastest rate in more than two years in the first week of September, as the summer trading lull ended abruptly and bullishness towards oil evaporated.

Hedge funds and other money managers sold the equivalent of 171 million barrels in the six most important petroleum futures and options contracts in the week ending on September 8, the fastest rate of selling since July 2018.

Recent government data showed the hedge fund community swung from being neutral or even mildly bullish towards oil in late August to strongly bearish by the end of the first week of September.

That begs the question, did hedge funds buyers return last week to produce the nearly 10% rally, or were they caught on the short side and forced to cover?  We won’t know until the Commodity Futures Trading Commission releases its latest positions report.

Last week, December WTI crude oil settled at $41.61, up $3.53 or +9.27% and December Brent crude oil finished at $43.68, up $3.25 or +7.44%.

Last week’s rally was driven by a nearly perfect storm of events. Hurricane Sally forced oil companies to shut down production, the government reported a drawdown instead of a build in stockpiles, and OPEC+ demanded better compliance to its production cuts. These three events more than offset another doom-and-gloom outlook for demand by the International Energy Agency (IEA).

OPEC+ Leaders Strongly Urge Compliance

The Organization of the Petroleum Exporting Countries (OPEC) and other producers in OPEC+ are currently cutting 7.7 million bpd of output and the group stressed at a meeting on Thursday that it would take action against members not complying with the deal. Additionally, the Saudi Arabian energy minister said those who gamble on oil prices would be hurt “like hell”.

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Bullish EIA Report Spikes Prices Higher

Crude inventories fell to their lowest since April at 496 million barrels in the week to September 11, sliding 4.4 million barrels, compared with analysts’ expectations in a Reuters poll for a 1.3 million-barrel rise.

Weekly Forecast

At the start of the week, the focus for traders will be on another tropical storm that is taking aim for the U.S. Gulf of Mexico region, halting some production. It looks as if this storm is headed for the coast of Texas, which means the area affected by last week’s Hurricane Sally, is likely to resume production. Nonetheless, because of the uncertainty, prices are likely to be underpinned.

Perhaps helping to put a lid on prices is the news that Libya’s National Oil Corp lifted force majeure, which could mean more oil will be hitting the market.

Given the back-to-back hurricanes and production shutdowns and now the possibility of a third, this week’s EIA inventories report will be hard to predict and may actually carry more weight than usual. This means be ready for a surprise.

We also need to find out if the hedge funds reversed and went long, or if they were caught on the wrong side of the market and forced to cover shorts. Given the bleak outlook for demand, it is possible that the hedge funds will take advantage of the current rally and initiate new short positions.

Keep in mind that hurricane season will pass and production will return to normal, but no one is certain about demand so we still feel the market is bearish.

For a look at all of today’s economic events, check out our economic calendar.

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