The positive momentum seen in crude oil following Opec's agreement to work towards cutting production by November 30 has continued into its sixth day. The American Petroleum Institute reported a surprisingly large inventory drop yesterday ahead of today's update from the Energy Information Administration where surveys point to the first rise in six weeks.
The dust has yet to settle following Opec's agreement last week to work towards cutting production by up towards 700,000 barrels. This, the first cut in eight years, has rightfully helped to create a floor under the market as Saudi Arabia goes back to its role of managing price instead of going after market share.
The important details of the deal, such as who will cut and by how much, still need to be hammered out before being made public at the November 30 Opec meeting.
But for now the market has given Opec the benefit of the doubt in the belief that the cartel not only will, but also has to deliver a tangible cut as a failure here could see the market sending the price of oil sharply lower once again.
So far the technical picture has improved and this has helped reduce short positions while supporting the initiation of new longs in the market. The weekly Commitments of Traders
report due Friday, which will cover the week ending October 4, will give us an important gauge as to how much hedge funds have changed their positioning after the deal was announced.
Ahead of the announcement on September 28, hedge funds had been net buyers of WTI and Brent crude oil with a rise in the Brent crude oil gross-short being more than offset by a jump in the WTI crude oil gross-long.
Bullish traders and investors are now focusing on the potential break of the necklines on the head-and-shoulder formations seen in both the WTI and Brent crude oil futures charts.
A break here would signal the potential for a significant move higher in both.
WTI crude oil could target $65/barrel on a break above $52/b while for Brent, the much-closer-to-the-market break of $52.2/b could signal an extension to $67.25/b.
WTI crude oil, weekly chart:
Source: Saxo Bank
Brent crude oil, weekly chart:
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Source: Saxo Bank
A strong technical drive, however, carries the risk of defeating itself with higher prices eventually creating headwinds as the fundamental outlook for non-Opec producers begins to improve significantly while also raising questions about demand growth.
Based on recent developments seen in US oil exchange-traded funds, retail investors have been much less inclined to jump on the bullish bandwagon. During the past week, fund flows for US energy ETFs have been negative to the tune of $249 million.
Activity has picked up in the popular triple exposure ETFs with DWTI (3x short) seeing inflows of $275 million while UWTI (3x long) has seen redemptions of $344 million.
The USO ETF comes second with a redemption of $165 million.
Commodity fund flows for US ETFs since September 27:
Technicals aside, the market will be focusing on the weekly petroleum status report from the EIA later today. Expectations for the first weekly inventory rise in six weeks were somewhat dented yesterday when the API reported a 7.6 million barrel decline.
A survey carried out by Bloomberg points towards a 1.75 million barrel inventory drop while recent developments can be seen in the below table.
— Edited by Michael McKenna
Ole Hansen is head of commodity strategy at Saxo Bank