Can the Rally in Crude Oil prices continue?
The big question in the commodity markets these days is “Can crude oil continue to extend its 9-week rally?”? From what I can see emerging in the market, the answer would be a resounding “yes”.?
Let′s take a look at the NYMEX futures contracts for WTI Physical Crude Oil, RBOB Gasoline, ULS Diesel and the ICE Light Sweet Crude Oil contract.?? All look poised to continue the strong rally which has persisted since the start of July.?? While the overall commodities asset class looks listless (barring the cocoa and sugar markets), the Crude Oil markets are supported by rising demand for futures from refineries, something that was largely absent in the first half of the rally in July.?
Back then, it was the cash market that was supportive with rising differentials lifting the futures market out of a first half 2023 slump.?? That first half weakness seemed to mirror macroeconomic concerns, namely the slowing Chinese economy and the impact of rising interest rates.?? But since then, we have seen production cuts by Saudi Arabia and Russia and the overall tightening of US total crude oil stocks which have been trending lower since the start of the year.??The decline in stocks comes despite rising production levels.
Now, most analysts are focused on whether or not the rally has the legs to continue in the months ahead.?? Looking at the CFTC’s Commitment of Traders (COT) Data I would have to say that the rally is built on sound footing and will likely carry on into the rest of the year, with a test of $100/bbl for the NYMEX WTI contract likely by Q1-24.??
The table below combines the COT data (Futures Only) for the following futures contracts:
1)???? NYMEX W.T.I. Physical Crude Oil
2)???? ICE Light Sweet Crude Oil
3)???? NYMEX R.B.O.B. Gasoline??
4)???? NYMEX N.Y. Harbor Ultra Low Sulfur Diesel
Here are my observations:
·??????? Total Open Interest has been stable over the course of the 2-month rally and poses no red flags.
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?·??????? Producer Merchant Longs (Refineries/end Users):? Their long futures position has risen by 9% in the last 5 weeks, rising to a new 8 week high.? The addition of price cover into a rising market is the strongest affirmation of a sustainable rally.?? Their long-hedged position now stands at a robust 82.8% of their historic maximum long, confirming that the demand side is strong.?
?·??????? Managed Money Gross Longs:??? The gross speculative longs have been declining for the last 4 weeks, confirming that the recent gains are not speculative.? This position now stands at only 35.1% of its historic maximum long, implying that if the speculative funds decide at some point to begin adding to their long positions there is a lot of room historically to increase this position before the market gets too frothy.? As such there is the potential for significant upside price gains from current levels.
?·??????? Managed Money Gross Shorts:? This category has been declining steadily for the last 10 weeks, falling to its lowest level since April.?? As such, speculative short covering has been a supportive factor of late though this will likely exhaust itself in the next few weeks.? This position is now only at 23.3% of their historic maximum short position.?? Yes, there is also room for the gross shorts to add to their position, but this will not happen in a rising market with tightening supplies.
·??????? Despite the fact that the net Managed Money Long position has barely changed in the last 7 weeks, futures prices are up $12/bbl. during that time.?? Again, this is affirmation that the rally is built on the back of solid end-user demand and not on speculation.
Barring any sudden collapse of demand or some catastrophic geopolitical event, the Crude Oil market is telling us that it is indeed poised for sustained price gains in the weeks and possibly months ahead.?? My short-term target would be $94 for WTI (Brent up to $97) with a further target up to $104 (Brent to $106) by Q1-2024.
#commodities #crudeoil #gasoline #futuresprices #managedmoney #CFTC #CommitmentofTraders #alternativeinvestments
Commodities Broker
1 年I agree, the Russia and Saudi cuts seem to be political leading to a US election year although given domestic prices and supply in Russia I wonder how long they can do this(prices very low, tanks close to full from what I have heard) . Over the course of the next year I would imagine that we could see significant increases in oil prices but again we have to remember this is an election yr and many vote with their wallets so will prices be allowed to rise? The rate, equity market and crude have risen in tandem, I think a decent correction in equity prices in the short term would help defuse additional momentum on the way up for rates and potentially signal to fed to stop additional hikes. It’s effect on crude more difficult to gauge would expect some declines but for the fundamentals around balances to persist over the longer term. Conjecture at this stage but that’s what is am leaning toward.
Global Commodity Price Risk Management Lead at Asahi Group Holdings
1 年Thanks for the article, Luis. Great read. Interesting to see if minimal growth in the EU & US next year, with further slowing from China, can sustain crude +$100.. I have my doubts, but we need to see OPEC+ change course, before we see any weakness coming through to price ??
Operations Director - Supply Chain and Procurement
1 年I Hope not for my wallet’s sake ??