Hedge Funds and Swap Dealers Turn Bearish, Crude Oil Could Be Heading Back to $38 a Barrel

Witawat (Ed) Wijaranakula, Ph.D.
Wed Oct 21, 2015

The spot WTI crude oil price, traded on the Chicago Mercantile Exchange, tumbled to an intraday low of $44.86 per barrel on Wednesday to settle at $45.20 per barrel, after the U.S. Energy Information Administration (EIA) said that U.S. commercial crude-oil inventories rose to 476.6 million barrels, up 8 million barrels in the week ending October 16. Analysts had expected an inventory build of 2.2 million barrels. 

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 the crude oil price up 12.31% in October, before pulling back after a report that Russian Energy Minister Alexander Novak said Russia was ready to meet with Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers to discuss the market. OPEC's Secretary-General Abdullah al-Badri also said in early October that the oil exporter group should work together with producers outside OPEC to tackle the oil surplus in the global market. 

A meeting in Vienna on Wednesday between officials from OPEC and oil producers outside the group, including Russia, did not discuss restrictions on crude output or setting a target range for prices. Venezuela, however, has proposed a summit between heads of state from OPEC and other oil-producing nations in November to discuss the price needed to sustain future supplies, said Bloomberg. OPEC probably will not change its tactics and trim output until U.S. oil shale drillers in Texas and North Dakota are out of business.

Russia and Saudi Arabia, the world’s two biggest oil producers, indicated earlier this month that 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 October 13, there are 476,972 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 19,872 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 383,881 short positions, a decrease of 7,591 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 12,281 contracts, as crude oil prices were unable to break out the $50 per barrel resistance.

Technically, the crude oil price has been moving in a bearish ascending wedge chart pattern since the end of September. The crude oil price just broke down the ascending wedge and the projected price is $38 per barrel. There are technical supports at around $44.50 per barrel and $42 per barrel trendline resistance, respectively.

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