The oil bears are back, and they’re looking at OPEC before making their next move.
While money managers slashed bets on rising West Texas Intermediate crude prices for a ninth week in their longest retreat on record, short-selling jumped to the highest in more than a year. The rapid shift in sentiment sets the stage for an OPEC meeting on Sunday to discuss market conditions.
“It’s been a position where no one obviously wants to be long,” said Brian Kessens, who helps manage $16 billion in energy assets at Tortoise in Leawood, Kansas. “What OPEC needs to do is certainly come off the produce-as-much-as-you-can mode. OPEC’s the most important factor in the near-term.”
Investors will be waiting to see whether OPEC provides any indication that the group will trim production once again next year as futures plunge. A change in policy would follow President Donald Trump’s calls on the cartel to lower oil prices and ramp up output to make up for lost crude from Iran due to U.S.-imposed sanctions.
Among the reasons for the bearishness that has roiled the oil market are OPEC production at the highest since 2016, record U.S. output and waivers given to a number of importers of Iranian crude, including China.
“The supply side didn’t necessarily play out as they had expected, especially given the waivers, and at the same time, we were building stock and we still are,” said Ryan Fitzmaurice, an energy strategist at Rabobank. “From the long side, it was a questionable time to go max long.”
Hedge funds’ net-long position — the difference between bets on higher prices and wagers on a drop — in WTI crude slid 18 percent to 160,291 futures and options in the week ended Nov. 6, according to the U.S. Commodity Futures Trading Commission. That’s the lowest since September 2017. Longs fell 6.6 percent to the lowest since July 2015, while shorts soared 29 percent to the highest since October 2017.
But the bottom might be near for crude. WTI’s 14-day relative strength index is below 30, a level marking oversold territory. And there are still bullish factors in the market, such as Iran supplying less crude, declining production in Venezuela and risks in countries like Libya and Nigeria, according to Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London. Plus, demand should increase as we move into the winter, he said.
“With this level of correction and the supportive factors that I am looking at, we could see a turnaround,” said Tchilinguirian. Still, “if you were to ask traders right now, would you buy into this, the typical answer you’ll get is, I don’t know if I want to catch a falling knife.”
OTHER POSITIONS: The net-long position in Brent dropped 15 percent to 260,048 contracts, ICE Futures Europe data show. Longs fell 11 percent, while shorts rose 8 percent. Money managers cut their net-long positions on benchmark U.S. gasoline by 8.2 percent and cut net-longs on diesel by 13 percent, according to the CFTC.