Hedge Funds Find Oil Rally Less Likely
There was a minor debate at the end of April concerning whether or not crude oil was making a rally back into a higher price range. West Texas Intermediate (WTI) and Brent crude both broke out of their depressed ranges and into a potentially bullish position. The problem is that a bull needs time to really gain speed.
Just as prices were looking to hit a stronger stride, OPEC leader Saudi Arabia announced it was upping output to a thirty-year high. US drillers are still cutting their total rig count, but the recent drops are less severe. Total North American rig counts may be down from their October 2014 high, but upstream crude producers are giving a signal that production in the Western Hemisphere will remain high, regardless of lower prices. Additional output information from North America supports this idea, as output remains near record highs despite a near 50% cut in total rig count.
It seems both North American and OPEC producers are signaling that they are not willing to cut production drastically just in the name of boosting prices again. With a supply staying high on both fronts, hedge funds managers have dropped their net-long position on WTI by 2.1%, with both long and short wagers taking a fall as well. This is a reflection of the situation at present. In the commodities game, it’s all about projections. With very open signs of suppliers willing to up output for the foreseeable future, it is wise to drop expectations of future prices.
The downstream prices have seen effects of supply as well. Diesel prices are holding their definition as bearish, dropping below gasoline in some parts. Ultra low sulfur diesel in the US was traded with the least contacts since August of last year. Although the price drop delivers positive numbers for logistics suppliers, it remains a negative note for drillers, refiners, and sellers all along the oil stream.
Additional potential for spikes in pricing in both directions could stem from news about Saudi Arabia’s local conflicts – fighting rebel groups in Yemen are the tip of the iceberg for the Saudis’ regional tensions. US nuclear discussions with Iran have begun to strain the previously amicable relations between the two nations. The Sunni-ruled oil empire of Saudi Arabia has legitimate fears that Shia-ruled Iran could develop a weapons-grade nuclear program, despite promises exchanged at recent talks with the US.
The tensions between the Saudis and the Iranians are not just nuclear, however. If the US talks proceed well enough, Congress will lift long-standing sanctions against fellow oil producer, Iran. The Shia-Persian rival could then rebuild its crumbling oil industry with the help of outside investment. Having a serious competitor in the neighborhood is an economic threat to Saudi Arabia’s position of strength.
What to do?
Oil trading in the commodities and futures markets will be a game for gamblers and experts for at least the next six months. This is no environment for novice traders. Price variations will depend heavily on external factors and require quick action from anyone involved. For those who feel the risks are too high or too time-consuming, it may be time to reallocate resources to either stay with oil company stocks or more promising commodities for the short term.