Oil Prices Unlikely To Breakout Or Collapse
Oil prices took a breather in the second half of July, but the price correction may have been a temporary reprieve rather than the start of another downturn.
On Monday, WTI breached $70 per barrel for the first time in over two weeks, rising once again on fears of supply outages.
Part of the reason that prices sank so sharply in mid-July was because of a wave of liquidation by hedge funds and other money managers, selling off their bullish positions in crude futures. Two weeks ago, investors slashed their long positions on crude oil by the most in a single-week in more than a year. As Reuters points out, the shift in positioning was concentrated in the cut of long bets, rather than the increase in shorts. That suggests profit-taking rather than a belief that a deep downturn is imminent.
The reduction of net length helped push down oil prices for a few weeks, but it also let some steam out of the futures market. Investors had become overly bullish in their positions, so the reduction in net length leaves the market a bit more balanced. That means that there is now more room on the upside for oil prices.
Last week, money managers began scooping up bullish bets once again, with net length in Brent rising by more than 4 percent. That coincided with a recovery in oil prices and it suggests that oil traders believe the price correction went far enough. “It lines up with our call to buy the dip in July,” Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC, told Bloomberg. “We’ve been pretty vocal about adding to length through the July sell-off.”
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