Oil edged higher despite trade risks, but is a correction in the works? – Commodity News
April 4, 2018 2:26 pm
Oil prices rose in the latter half of March, aided by speculation the US is set to impose fresh sanctions on Iran, and expectations that OPEC could extend its production cuts into 2019. Strikingly, prices managed to climb even despite a deterioration in risk sentiment, which typically weighs on the precious liquid. However, with most of the “good news” priced in already, oil seems vulnerable to a near-term correction, amid an escalation in trade concerns and stretched-long speculative positioning.
A variety of factors helped to push oil higher in March. In geopolitics, the Saudi Crown Prince’s visit to the US recently, combined with the appointment of “Iran-hawk” John Bolton as US National Security Advisor helped to fuel speculation that a fresh round of sanctions is looming, which would likely remove a significant chunk of oil supply from markets. Recall that last year, the Saudi-led blockade of Qatar was initiated just a couple of weeks after President Trump visited Saudi Arabia.
Elsewhere, the continued declines in Venezuela’s output likely enhanced this bullish sentiment. Another encouraging development for prices were signs that US production is leveling-off for now. The number of active US rigs has largely remained flat over the past month, easing concerns that soaring US output is set to flood the market. Finally, comments from the Saudi oil minister that OPEC could continue to coordinate supply cuts in 2019 with producers like Russia were the cherry on the pie for oil bulls.
All these factors helped prices to advance, despite rising concerns of a trade war weighing on risk appetite. Note that oil and stocks were highly correlated in recent months, as a potential trade skirmish between the US and China would probably diminish demand for oil. The question facing oil traders at the moment is how much of the above “good” news is already priced into oil prices, and what risks still remain to be discounted.
The main risk for prices in the near-term may be the stretched net-long speculative positioning in the market. In the week ending March 27, speculative net-long bets on oil were hovering near all-time highs, as fund managers turned aggressively bullish on oil given the above-mentioned developments. Long positions outnumbered short ones by a record ratio of 12.5 to 1, Reuters reports. In other words, almost all funds are betting on oil rising, which renders prices highly vulnerable to any piece of negative news. Any bearish headline could lead to much sharper-than-normal downside reaction in oil, as so many players would simultaneously rush to cover or to trim their long positions.
A potential catalyst for a correction could be a further intensification of trade risks, which leads investors to reassess the outlook for oil demand in the coming years. In a sense, this is already evident. The latest two large tumbles in oil prices were caused by China announcing its own countermeasures to the US tariffs. On the supply side, potential triggers for a correction would be signs that US oil production is soaring again, or that OPEC & non-OPEC production is rising despite the production-cut deal. Russia’s output may bear especially close attention, as it reached an 11-month high in March. A rebound in the US dollar could also work against prices.
Looking at WTI, declines could push prices below the crossroads of the $62.15/barrel level and the uptrend line taken from the lows of August 31, 2017. In such case, support may be found near the March 14 low of $60.10, with even steeper falls likely to bring into focus the $58.20 zone, marked by the February 14 troughs.
On the flipside, in case the US does impose new sanctions on Iran or US-China trade tensions subside, WTI could edge higher and re-test the $64.15 hurdle, defined by the inside swing low on March 22. An upside break of that territory could bring into play the April 2 highs of $65.40, with even further advances opening the way for the liquid’s March 25 highs, at $66.55.
Oil prices rose in the latter half of March, aided by speculation the US is set to impose fresh sanctions on Iran, and expectations that OPEC could extend its production cuts into 2019. Strikingly, prices managed to climb even despite a deterioration in risk sentiment, which typically weighs on the precious liquid. However, with most of the “good news” priced in already, oil seems vulnerable to a near-term correction, amid an escalation in trade concerns and stretched-long speculative positioning.
A variety of factors helped to push oil higher in March. In geopolitics, the Saudi Crown Prince’s visit to the US recently, combined with the appointment of “Iran-hawk” John Bolton as US National Security Advisor helped to fuel speculation that a fresh round of sanctions is looming, which would likely remove a significant chunk of oil supply from markets. Recall that last year, the Saudi-led blockade of Qatar was initiated just a couple of weeks after President Trump visited Saudi Arabia.
Elsewhere, the continued declines in Venezuela’s output likely enhanced this bullish sentiment. Another encouraging development for prices were signs that US production is leveling-off for now. The number of active US rigs has largely remained flat over the past month, easing concerns that soaring US output is set to flood the market. Finally, comments from the Saudi oil minister that OPEC could continue to coordinate supply cuts in 2019 with producers like Russia were the cherry on the pie for oil bulls.
All these factors helped prices to advance, despite rising concerns of a trade war weighing on risk appetite. Note that oil and stocks were highly correlated in recent months, as a potential trade skirmish between the US and China would probably diminish demand for oil. The question facing oil traders at the moment is how much of the above “good” news is already priced into oil prices, and what risks still remain to be discounted.
The main risk for prices in the near-term may be the stretched net-long speculative positioning in the market. In the week ending March 27, speculative net-long bets on oil were hovering near all-time highs, as fund managers turned aggressively bullish on oil given the above-mentioned developments. Long positions outnumbered short ones by a record ratio of 12.5 to 1, Reuters reports. In other words, almost all funds are betting on oil rising, which renders prices highly vulnerable to any piece of negative news. Any bearish headline could lead to much sharper-than-normal downside reaction in oil, as so many players would simultaneously rush to cover or to trim their long positions.
A potential catalyst for a correction could be a further intensification of trade risks, which leads investors to reassess the outlook for oil demand in the coming years. In a sense, this is already evident. The latest two large tumbles in oil prices were caused by China announcing its own countermeasures to the US tariffs. On the supply side, potential triggers for a correction would be signs that US oil production is soaring again, or that OPEC & non-OPEC production is rising despite the production-cut deal. Russia’s output may bear especially close attention, as it reached an 11-month high in March. A rebound in the US dollar could also work against prices.
Looking at WTI, declines could push prices below the crossroads of the $62.15/barrel level and the uptrend line taken from the lows of August 31, 2017. In such case, support may be found near the March 14 low of $60.10, with even steeper falls likely to bring into focus the $58.20 zone, marked by the February 14 troughs.
On the flipside, in case the US does impose new sanctions on Iran or US-China trade tensions subside, WTI could edge higher and re-test the $64.15 hurdle, defined by the inside swing low on March 22. An upside break of that territory could bring into play the April 2 highs of $65.40, with even further advances opening the way for the liquid’s March 25 highs, at $66.55.
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