Are Oil Bulls About To Be Burned Again?

Tyler Durden's picture

Authored by Nick Cunningham via,

Oil investors have grown more optimistic as of late, as oil prices have moved back to $50 per barrel. The market appears to be on sounder footing, suggesting that things will gradually tighten for the rest of the year. But it is unclear how far oil prices can really move above today’s position.

Hedge funds and other money managers have begun buying up long positions on oil futures, a sign of growing bullishness. Reuters analyst John Kemp argues that the positioning of hedge funds has entered the third bullish phase of 2017, after two previous cycles ran their course earlier this year.

In fact, the most recent data saw the largest weekly increase in net-long positions so far this year, and interestingly, Kemp points out that the net-long build is due to new long positions, rather than simply just a reduction of shorts.

In other words, investors are betting that crude oil prices will rise.

And for good reason. U.S. shale production growth has slowed, as has the rig count. Inventories have finally posted significant declines, which appear to be ongoing. Some high-profile shale drillers have announced spending cuts. And Saudi Arabia is moving to cut oil exports to Asia, a sign that OPEC’s most powerful member intends to do its best to accelerate market tightening.

Plus, although OPEC compliance has slipped in the past two months, the cartel met this week to figure out a way to hold the laggards to their word. Nothing particularly concrete came from the meeting, but the group seems determined not to let things fall apart. "Discussions were conducted in a constructive atmosphere and proved fruitful," OPEC said in a statement. "The conclusions reached with the countries at the meeting will help facilitate full conformity.” Few details were provided.

But can things continue on this upward trend?

The biggest question now is, was that July rally just a lot of short covering, or does it have staying power?” Mark Anderle, director of supply and trading at TAC Energy, told the Wall Street Journal.


“The market’s just content to go sideways and figure that out.”

Despite the newfound optimism, analysts do not see much upside from here. For example, Barclays said in a recent research note that the rally is probably unsustainable. "Prices have moved higher, due to a perfect combination of a favorable macro environment, a seasonal uptick in consumption, continued inventory drawdowns, and geopolitical unrest," the investment bank wrote. "Certain factors that supported prices in July are unlikely to last, and we expect a downward correction during this quarter."

The recent price gains, at least in part, were driven by greater bullishness from speculators, but absent a more dramatic improvement in the underlying fundamentals, those speculative movements can only take things so far. "Fundamentals remain shaky this quarter, therefore any rally that occurs before more substantive inventory draws would be short-lived,” Barclays analysts added.

One particular concern for oil bulls is the fact that U.S. shale producers are likely to turn up the pace of hedging with oil at $50 per barrel, locking in future production and ensuring that new supply comes online. Citigroup says that a new round of hedging is already underway. With the certainty of oil sales for 2018 in hand, shale producers can proceed with more drilling. That means more supply will be forthcoming, capping the price rally.

Moreover, without visible signs of ongoing improvement in the physical market, investors could start to sour on prices again. As John Kemp of Reuters points out, the liquidation of short bets on oil futures and the sudden increase of longs ultimately means that “it may prove tough to sustain the recent upward momentum in crude and product prices.” When investors take things too far, the pendulum tends to swing back. With speculators having already staked out bullish positions, there is less room to run on the upside.

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order66's picture

OPEC bullshit or not, Oil above $40 makes ZERO sense.

Juggernaut x2's picture

Oil could get to $25 (which the Fed would never allow for an extended period) and gas would still be $2+ a gallon

Da chief's picture

Weed is the new oil.

Forex Kong now heavily investing in Canadian Marijuana Companies. This guy nails it - often.



Iskiab's picture

It'll be heavily regulated, there's huge upside but until more is known about how the government will intervene it's impossible to know how it will play out. It's worth a gamble, but just know it's a gamble.

Xscream's picture

Make no moves till Gartman speaks.

ReturnOfDaMac's picture

Then take the other side, Gartman will make you rich!

Thomas W. Swift's picture

Fossil fuel of all kinds is a dead man walking.

Lesson #2: Important Inventors of History You (mostly) Haven’t Heard Of

BEARDEN, TOM: American physicist and inventor. Best known for his pioneering work regarding the theoretical basis of permissible systems with COP>1, also has an issued patent for the “Motionless Electric Generator”.
BEDINI, JOHN: 1949?-2016. American inventor and audio engineer. Best known for his groundbreaking work in advanced analog audio systems and substantial contributions to the field of free energy research, including a number of published designs for self-running machines.
DOLLARD, ERIC: Has demonstrated many aspects of Tesla’s technology including a mild form of overunity. Best known for his theoretical work building on Steinmetz and Heaviside.
GRAY, EDWIN: 1925-1989. Best known for his “EMA Motor”. An early prototype of the EMA motor was tested at Caltech and found to be overunity with a COP of 278.
LEEDSKALNIN, ED: May have had both overunity and levitation.
MEYER, STAN: Demonstrated the “water car”, a dune buggy converted to run on 100% water by overunity electrolysis.
MORAY, THOMAS HENRY: Repeatedly demonstrated his trunk-size device with no moving parts and no obvious external power source generating more than 50 kilowatts of power. Many reliable witnesses saw this in multiple locations and sworn statements exist.

Juggernaut x2's picture

Ford is going to invest heavily in electric cars.

Thomas W. Swift's picture

Forgot a few! Of course this is only a badly incomplete list, a more complete list would be far, far longer.

SEARL, JOHN: 1932-present. Built and demonstrated the SEG, the Searl effect generator. A magnet-based dynamo, it generates excess electrical power. Some early units were lost because they had a tendency to levitate once self-powering RPM was achieved.
SMITH, DONALD: Demonstrated a suitcase-size overunity device in front of a crowd at the 1996 Tesla Tech convention. In addition to numerous witnesses, video exists of this event and measurements showed that no conventional power source could produce the sustained amount of energy demonstrated (10x 100W light bulbs).
SWEET, FLOYD: Best known for his “Vacuum Triode Amplifier”, a solid state brick-sized device with no moving parts that generated sizeable electrical output with milliwatts of drive power. Later versions could produce several kilowatts of power, and the device was measured to lose weight under load.
TESLA, NIKOLA: 1856-1943. Serbian-American inventor who is best known for his contributions to the design of the modern alternating current electricity system. Also discovered radiant energy.

Iskiab's picture

What's technologically possible is irrelevant. What matters is the cost of energy and maintenance. Once it's low enough for energy to substitute oil the market will change fast, the million dollar question is when.

Thomas W. Swift's picture

Cost of energy: zero. Radiant energy is available in unlimited quantities at all points in the universe. Specific power density: high. Don Smith's tabletop machine was (supposedly) good for tens of kilowatts. Moray's had a demonstrated power output in excess of 50 kilowatts from a device the size of a small trunk. Maintenance costs: approximately zero. No moving parts, and semiconductors operated conservatively within their ratings could have an estimated lifetime of 10-20 years. Time frame: soon, as soon as I get done properly testing and documenting the prototype for release.

I think perhaps people on here are confusing me with previous posters on the subject. The difference is that I'm the guy who has successfully replicated it personally and seen it work with his own eyes. Once I have a finished article that doesn't look like a thrown-together bench test boilerplate unit, it is my choice when, where, and how to unleash it on the world. Prepare accordingly.

Oh yes: I forgot Tariel Kapandze, google him if you'd like to see some nice videos of a working unit developing many kilowatts of power from thin air.

NoWayJose's picture

Bullshit article. Oil is up because "in Wall Street's eyes" - it is one of the few things that is 'cheap'. There are only so many suckers willing to buy FANG stocks at lofty levels or even chase the Dow and S&P at all-time highs. There is so much 'money' looking for someplace to land - we even see stories like T Rowe Price cutting US equity exposure and buying commodities and gold. Thus 'oil' - which is way down despite the recent small uptick - is attractive to this free money. At some point the algos will find the right combination of oil shorts to squeeze, or we will get Goldman's hit squad to start a refinery fire or jam up barges, or a hurricane will hit the Gulf - and suddenly oil is at $60 and this same "paid" author will be screaming $80 oil!

Last of the Middle Class's picture

A rising tide increases all commodity prices. QE forever !!!!