Sentiment Toward Oil Running High

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.

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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.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.


  1. This seems to be the closest place to comment on the extreme generalization that accompanied this article in my Inbox this morning.

    “The rich don’t work for money – the rich invent money.” Robert Kiyosaki

    That may be true for some rich people, but we have spent the last twelve years building a small family business that is finally turning the corner. Fortunately I have a stable salary at an engineering firm. My wife and son, who have run the whole operation until we got a general manager this year, have taken home half or less than many of our employees while working more hours than anyone else. My wife worked at it for several years for nothing. This summer they got their first raises in six years and still make less than several employees even though they are still working more than any of our employees. Next year there will very likely be enough money that we would be called “rich”, but it is because there have been many years of hard work.

    Such ignorant generalizations only foster envy and strife.

    The banks and the Fed are who “invent” money.

    • Just a thumbs up to Duane and his family. Our society USED to hear and understand this story, of sacrifice and sweat making wealth, even if the payout was delayed. It would Inspire, not cause Jealousy. I myself slowly BUILT a house, but the current generation seems to simply see me as “Lucky”, or somehow “I didn’t build it, it all happened by government magic”.. now where would they get That idea? You and I have CREATED VALUE and I salute you.

      • Good for Duane and his family. That’s how it works. I hope that smarter people don’t buy into the garbage they get from the media.

  2. I see cheers to you both. I am an owner of a small business in the construction field. When I look back I never recall working so hard that it frustrated my lifestyle. That being said I have found myself very comfortable in my twilight years. On the other hand the woman that I met 10 years ago has received a disability check for the past five years of $3200 a month. With my help and her government payment she leads a comfortable life but I do not see this contributing to a higher self-esteem and self-worth. Even though I have created a comfortable life for both of us she does not seem fulfilled but does not feel she needs to look elsewhere to supplement her income. She’s been told by a government for years that this is all right that this is their God-given right. On the other hand I am very happy with my success And what it’s brought to my life. I will never understand our situation completely but I’m glad I was raised in a family that taught a good days work for a good days pay and the enrichment in life that will bring.