Oil prices have been surging in the last four and a half months with the price of West Texas Intermediate Crude vaulting above the $57 a barrel price earlier this week and that is the highest the price has been since June ’15.
We see on the weekly chart how the price just moved above the consolidation area in the $55 range. Oil hovered around the $55 mark from December ’16 through the end of February ’17 before it broke lower and moved down to $42.05 a barrel in June. The commodity has been climbing since that low and has gained approximately 36 percent from the low to the high.
While the price action is encouraging for oil bulls, it might be a little too good based on how much the sentiment has changed. The most recent Commitment of Traders (COT) report shows that large speculators are net long over 500,000 contracts. If you are not familiar with the COT report it breaks investors in to three categories: large speculators, commercial hedgers and small speculators. Each week the report shows a net position for all futures contracts for each category. If one large speculator is long 2,000 contracts and another is short 1,000 contracts, that is a net long of 1,000 contracts.
The chart of the COT shows that this is the first time since the first week of March that large speculators have been net long more than 500K contracts. Going further back, I looked at 2014, 2015 and 2016 and not once in those three years was the net long position over 500K contracts.
The price chart shows us how the technical picture looks and the COT chart tells us about the sentiment, but what about the fundamental outlook? Well, the oil inventories report for this week came out earlier and showed that inventories rose 2.2 million barrels and that erased almost all of the shortfall from last week.
There are other fundamental factors at work as well. The recent arrests of members of the Saudi royal family are certainly concerning as the turmoil could have a huge impact on the economy of the country and as one of the most prominent oil producing countries in the world, the impact could be enormous. We also have to consider the situation in Venezuela and the world’s largest reserve pool.
I think most investors assume that oil production could be disrupted and that would cause the price of oil to continue rising. However, Venezuela could be in a situation where they have to release some of the reserves in order to meet debt payments that are coming due. The situation in Saudi Arabia is different as the government there isn’t in dire need of cash, but if corruption charges surface that show oil prices were manipulated, this could also cause oil prices to tumble.
It is hard to say how the situations in Venezuela and Saudi Arabia will sort out, but when the majority of investors are counting on it working out one way, that is when it pays to bet on the opposite outcome.