Crude Oil Price Run-up by Hedge Funds on Elusive Russia-Saudi Talks Could Backfire and Send Price Back to $40 a Barrel

Witawat (Ed) Wijaranakula, Ph.D.
Wed Oct 7, 2015

The spot WTI crude oil price, traded on the Chicago Mercantile Exchange, surged to an intraday high of $49.71 per barrel on Wednesday before tumbling 3.82% to settle at $47.81 per barrel, after the U.S. Energy Information Administration (EIA) said that U.S. commercial crude-oil inventories rose to 461 million barrels, up 3.1 million barrels in the week ending October 2. Analysts had expected an inventory build of 2.5 million barrels. 

The market was caught by surprise as the American Petroleum Institute reported late Tuesday that U.S. crude oil inventories had a drawdown of 1.2 million barrels in the latest week, and by the EIA report on Tuesday showing U.S. crude production fell 120,000 barrels a day (bpd) in September from a month earlier.

Excluding the Strategic Petroleum Reserve of about 695.1 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. The U.S. consumes an average of 19.11 bpd and produces about 9.14 million bpd. 

Hedge funds ran up the crude oil price 6.15% on Tuesday after a report that Russian Energy Minister Alexander Novak said Russia was ready to meet with OPEC and non-OPEC producers to discuss the market. OPEC's Secretary-General Abdullah al-Badri also said on Tuesday that the oil exporter group should work together with producers outside OPEC to tackle the oil surplus in the global market. 

Any talks between Russia and Saudi Arabia seem to be elusive at best as Saudi Arabia demanded last week that Russia end raids in Syria, while a group of Saudi clerics are calling for jihad against the Russians in Syria.

Russia and Saudi Arabia, the world’s two biggest oil producers, indicated Friday they weren’t pulling back their huge crude output levels any time soon. According to The Wall Street Journal, Russia produced oil in September at levels not seen since the fall of the Soviet Union, pumping an average of 10.74 million bpd, up 0.4% from August. 

The Saudis have ramped up production above 10 million bpd for the past few months. Saudi Arabia told OPEC that its June production of 10.564 million bpd was a record, exceeding a previous all-time high set in 1980. Bloomberg reported that Saudi Arabia’s commercial petroleum stockpiles increased to 320 million barrels, the highest since at least 2002, from 319.5 million barrels in June, according to data on the Riyadh-based Joint Organisations Data Initiative's website in late September. 

As of September 29, there are 481,485 long positions of non-commercial contracts of light sweet crude oil futures, traded on the New York Mercantile Exchange by hedge funds and dealers, a decrease of 7,719 long positions from last week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC) each Friday. 

This is compared to about 229,757 short positions, a decrease of 18 short positions from last week where light sweet crude oil contracts are traded in units of 1,000 barrels. Hedge funds and dealers have decreased their net long positions by about 7,701 contracts, as crude oil prices reached a key inflection point last week.

Technically, the crude oil price has been moving in a descending wedge chart pattern since June. In late August, Venezuela asked OPEC for an emergency meeting, which sent the crude oil price soaring and broke out the descending wedge. Since then, the crude oil price has been moving in a symmetrical triangle chart pattern as traders can’t decide in which direction the crude oil price will be moving next. 

Hedge funds decided to take the crude oil price up on Tuesday following the report about the Russia and Saudi talks. The crude oil price continued to surge to an intraday high of $49.71 a barrel on Wednesday in anticipation of bullish EIA data but had a trend reversal to close at $47.81 a barrel, below the previous day's close of $49.04 a barrel.

The double-top reversal chart pattern has now emerged. It looks more likely that the crude oil price will eventually break down and head back to retest the $44.50 per barrel level, as the global crude oil supply continues to build. A confirmed double-top reversal chart pattern could send the crude oil price back to the $40 a barrel level.

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