A change in investor sentiment could easily result in oil prices falling back to the low $30’s per barrel. That’s the view of Barclays who highlight that net positions from money managers (e.g. hedge funds and other speculators) in crude are approaching bullish extremes, a position from where sentiment has reversed very rapidly over the past couple years (figure 1). If sentiment does change quickly and this is reflected in money managed positions then this could imply that WTI crude futures prices fall back close to $30 per barrel (figure 2).
According to John Kilduff, partner at Again Capital LLC, a New York hedge fund focused on energy has called into question the staying power of the rally in prices.
“The rally has come from shorts getting scared out of their positions, and you’re not seeing a lot of money coming in on the long side.”
He goes onto say.
“short positions on West Texas Intermediate crude, or bets that prices will fall, have dropped by 131,617 contracts since Feb. 2, the biggest liquidation in CFTC data going back a decade. To close out a bearish position, traders buy back futures and options, putting upward pressure on prices. In the same period, bullish wagers fell by 971. In the past 10 years, there have been only two other seven-week short-covering streaks, CFTC data show. The first started in September 2009 and the second in December 2012. Both were much smaller than the recent one and were accompanied by oil rallies.”
The one catalyst most responsible for sending the price of oil from its 13 year lows hit in early February some 50% higher in the following month, has been the recurring rumor about an “imminent” OPEC production freeze meeting. This was initially supposed to take place in early March, then 20th March and now 17th April. Any further delays or obfuscations are likely to reduce OPEC’s credibility and the sustainability of the recent rally even further.