11 October 2016 at 11:38 GMT
- Putin's accession to Opec deal spurs Brent to 1-yr high
- Rally could stay around for a while longer
- The rally may end by 'own goal' if US producers return
The rally would fail should US shale producers return in force. Pic: iStock
By Ole Hansen
Crude oil has rallied more than 15% since Opec agreed to work towards cutting production. The latest boost – courtesy of president Vladimir Putin's committing Russia to join the freeze – has taken Brent crude oil to a one-year high. Though full details of the deal are yet to be agreed the market has been rallying on a wave of positive momentum and technical buy signals.
The rally has the potential of continuing for a while longer, not least considering how easy it has been moved by supporting comments from various producers. But the bigger the rise the stronger the risk of the rally ending up defeating itself as it carries the potential of opening the door right up for high cost producers, especially those in North America.
A higher price is good news for producers reeling from two years of low prices. But a price too high carries the risk that the supply glut will be be reduced much slower, both from rising non-Opec supply but also from the potential that higher prices may slow demand growth.
The days following the Opec agreement large hedge funds and money managers increased the combined bullish bets on WTI and Brent by a record 141,000 lots in just one week. This took the combined net-long to 612,000 lots and the gross-long to a new record of 810,000 lots.
The increased volatility in oil has to a certain extent been driven by funds jumping in too hard on a direction with the result that they all were forced to head for the exit at the same time. Since combined data for Brent and WTI crude oil positioning became available in 2011 we have seen just six weekly position changes of more than 100,000 lots. FOUR of these have occurred during the past EIGHT weeks.
Today we have seen the market trading more cautiously, not least due to the dollar which is once again moving higher. Against a basket of currencies it has reached its highest level since July 27 with the reasons behind this renewed strength being explained here
by John Hardy.
Source: Saxo Bank
The dollar move may remove some of the short-term excitement in the oil market but no major long-liquidation is likely to be seen unless we start break below $49 in WTI crude or $51.25 in Brent crude.
Source: Saxo Bank
Latest video update here
where I talk about the current positive sentiment but also the self defeating dangers associated with a much stronger rise from here.
– Edited by Clare MacCarthy
Ole Hansen is head of commodity strategy at Saxo Bank