Last week’s G20 meeting got all of the attention from investors and the media. Well, actually it was the meeting between President Trump and President Xi that got all of the attention. The two leaders did agree to a truce in the tariffs, and that was a positive step, but it certainly didn’t mark the end of the trade war.
While everyone’s attention was on the G20 meeting, OPEC had a meeting of its own, and there has been little to no attention devoted to that meeting. What came out of the meeting on July 1 was an agreement by participating countries to keep production cuts in place until 2020. The cuts are an effort to keep oil prices from collapsing, but even after the meeting the price of oil hasn’t been able to move up.
Looking at the daily chart of West Texas Intermediate Crude (WTIC), the price was unable to move back above its 50-day moving average. The price jumped in the second half of June, but that was due primarily to the expectations that the Fed would make an interest rate cut in July. Oil and the U.S. dollar have an inverse relationship, and when the Fed came out with a more dovish stance, the dollar fell, and oil prices rose—as did gold prices.
The jump in oil prices was also fueled by increasing tensions between the U.S. and Iran. Those tensions seem to have toned down a little in the last few weeks, but could increase again at any point in time.
Looking at the weekly chart of WTIC, we see that there is a lot of technical congestion in the $60 area. The 13-week (close to the 50-day) is at $59.20 while the 52-week moving average is at $60.35. It is going to take a strong move for the price to break through all of that resistance.
Looking at the sentiment toward oil, the large speculator group has been growing more bullish as a whole, but not in a big move. If we look at the Commitment of Traders report below, large speculators are net long over 378K contracts and the net long position has increased in the last few weeks.
What is kind of odd is that if we look at the table at the bottom, the group has been decreasing the number of contracts held long and the number of contracts held short as well. The number of contracts held short just happens to have dropped faster, and thus the net position has increased.
What this suggests to me is that large speculators aren’t exactly confident that oil is going to continue the rally from June. If the group was at or close to a bearish level, I would feel more confident in an oil rally.
Large speculators haven’t been net short oil since October 2008, so it isn’t very often that we see a net short position. If the net long position falls under 300K contracts, that could be enough of a “bearish” posture to help oil prices—from a contrarian viewpoint.
We saw the net long position fall under 300K at the end of December and early January before oil rallied. The group also held less than 300K contracts net long in early 2016 when that rallied started.
While I am not expecting WTIC to move through the $60 level anytime soon, I would suggest that investors watch the Commitment of Traders report and should the net position drop below 300K, we may get a bounce back rally. If the dollar does happen to fall after the July Fed meeting, a combination of a weaker dollar and large speculators being less enthusiastic could be enough to push oil through the $60 mark.