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The Smart Money Is Still Betting Against Crude Oil

The Smart Money Is Still Betting Against Crude Oil thumbnail

Crude oil prices have remained relatively calm since their 25 percent late-August spike thanks to U.S. dollar weakness and reduced expectations of Fed rate hikes. As a result, many investors are wondering if the bottom is in for crude oil and energy stocks and whether it’s a good time to look for bargains. Ever since warning about the oil bust in June 2014, I have also been trying to determine where the bottom is for crude oil. Despite investors’ hopes, the fundamentals of the crude oil market have not changed much since the start of the year.

From a technical standpoint, WTI crude oil is sitting under a major resistance zone from $50 to $52 per barrel that needs to be broken to give another bullish signal. If WTI crude is unable to break above that resistance zone and weakens again, $40 is the next major support level to watch. A convincing break below $40 would lead to another bearish signal.

WTIDaily

Source: Barchart.com

Like WTI, Brent crude oil is beneath an important resistance zone from $55 to $60 per barrel that needs to be cleared in order to give a bullish signal. If Brent proves unable to break above that resistance and heads lower, $45 is the next major support level to keep an eye on.

BrentDaily

Recommended by Forbes

Source: Barchart.com

The longer-term WTI crude oil chart shows how important the $40 per barrel support level is. This level marked the peak of the first Gulf War oil panic in 1990 and acted as a key psychological support during the 2009 oil crash. This $40 support level was tested in late-August before crude oil rebounded 25 percent in just a few days. This support level needs to hold in order for a convincing crude oil bottom to form. A strong break below $40, however, could see prices hit $30, $20, or even lower, as some analysts have been warning. WTI is still below its uptrend line that started in 1999; a break back above this level would be a bullish confirmation.

WTIMonthly

Source: Barchart.com

$40 is also an important psychological level in Brent crude oil that needs to hold in order for a convincing bottom to form. A vigorous break below this level would give another bearish signal. As with WTI crude, Brent is beneath its uptrend line that started in 1999; a break back above this level would be a bullish confirmation.

BrentMonthly

Source: Barchart.com

Commercial crude oil futures hedgers (often considered the “smart money”) have used the rally of the past two months to add to their sizable net-short position, while the large traders (the “dumb money”) have added to their net-long position. The commercial hedgers’ aggressive short position shows that they are still skeptical of any rebound in crude oil prices for the time being, while the large traders’ long position shows that there hasn’t yet been a true capitulation or liquidation that typically signals a genuine market bottom.

COTDaily

Source: Finviz.com

The longer-term chart shows how both commercial hedgers and large traders had flat positions in WTI crude oil as recently as 2010.

CTOWeekly

Source: Finviz.com

The U.S. dollar plays a significant role in the direction of crude oil prices, but it has been treading water since the beginning of this year as it forms a wedge pattern. The dollar’s eventual breakout from this pattern (bullish or bearish) should strongly influence crude oil’s next major move. Due to their inverse relationship, a bullish dollar breakout would be bearish for crude oil, while a bearish dollar breakdown would be bullish for crude oil. The dollar’s powerful 2014 bull market was one of the main reasons why crude oil experienced a bust.

DollarWeekly

Source: Barchart.com

The dollar has eased in the past several months as investors lower their expectations of an imminent Fed rate hike, but has been supported by the specter of further stimulus from Bank of Japan and the European Central Bank as those economies flirt with deflation once again. Additional stimulus in Japan and Europe (especially if combined) is an important potential bullish factor for the U.S. dollar, even if the U.S. economy continues to stagnate and Fed Funds rate hikes are pushed off even further into the future.

The crude oil glut – a major bearish factor since summer 2014 – continues to persist and is growing worse again after showing signs of improving this spring. According to the EIA petroleum status report, inventories surged by an unexpected 7.6 million barrels in the week of October 9th to 468.6 million barrels. Moody’s recently adjusted its oil price forecast downward and warned that steady U.S. oil production will continue to keep a lid on prices in the next few years. In addition, Goldman Sachs expressed its skepticism toward the recent oil rebound, saying that the bounce was mostly driven by speculators and that the oil market will remain “oversupplied” into 2016.

Inventories

Source: Econoday/Haver Analytics

For now, traders should watch how WTI and Brent crude oil act at their key support and resistance levels shown in this piece. In addition, all eyes should be on the dollar to see how it breaks out of its 2015 consolidation pattern. Crude oil moves that aren’t confirmed by similar moves in the U.S. dollar should be viewed with more suspicion than those that are confirmed by the dollar.

(Disclaimer: All information is provided for educational purposes only and should not be relied on for making any investment decisions. These chart analysis blog posts are simply market “play by plays” and color commentaries, not hard predictions, as the author is an agnostic on short-term market movements.)

Forbes



27 Comments on "The Smart Money Is Still Betting Against Crude Oil"

  1. BC on Tue, 20th Oct 2015 8:11 pm 

    https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2cri

    https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2cqs

    https://research.stlouisfed.org/fred2/graph/fredgraph.png?g=2cr8

    https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/50878-MBR.pdf

    Private final sales (FS) per capita have stalled and the deficit/FS is set to increase.

    Prepare for a “stimulating” 2016-17 (to 2018-20?), a deficit/FS of ~15-16% (SAAR) at some point, and the Fed’s balance sheet at, or near, 40% of FS and approaching ~100% of bank loans less inter-bank loans, charge-offs, and delinquencies, i.e., effectively no fractional reserve lending at that point.

    Ready, gents?

  2. makati1 on Tue, 20th Oct 2015 8:25 pm 

    “Step right up folks and plunk down your last dollar to bet … er …invest in a sure thing!”

    Just Forbes pimping … er … doing their thing.

  3. BC on Tue, 20th Oct 2015 8:41 pm 

    Technically, there is the chance for a recessionary retest of the $37 low for WTI, with a stop at $32.

    There is no significant technical support below $32 until $24.

    Given that the oil/commodities cycle has turned down on a change-rate basis, it is conceivable that the 3- and 5-year price of WTI could decline from ~$95-$100 today to the $30s in the years ahead, with the $20s possible along the way.

    This would be expected with a further deceleration of real GDP per capita, liquidity trap and preference, and deflation.

  4. GregT on Tue, 20th Oct 2015 8:46 pm 

    BC,

    I posted this earlier. You may have missed it, or not.

    There was an interesting thread on the Kitco.com forums back in 2011, titled “Deflation Precedes Hyperinflation-Long Answer”. The guy was even interviewed on national TV about it. I would like to hear your take on this if you can find the time. Thanks.
    https://gold-forum.kitco.com/showthread.php?93752-Deflation-Precedes-Hyperinflation-Long-Answer&highlight=deflation+hyperinflation

  5. MrNoItAll on Tue, 20th Oct 2015 9:26 pm 

    The big question of course is how far down this path of financial decay can we get before panic sets in. Because the path of financial decay is the only path there is left to us. I imagine there must be a point where the sheer number of people with no work and no hope reaches critical mass. Sure, the government has prepared for that eventuality and they’ll be able to keep a lid on the simmering pot for a while. But for how long? When do desperate people start turning to crime and general mayhem on American turf without regard to consequences because they have NO HOPE? Or will the impoverished and disowned masses of the world (including Americans) simply sail quietly into the long dark night? Somehow, I doubt it. Trouble is most definitely brewing. So BC is asking a pertinent question: “Ready, gents?”

  6. rockman on Wed, 21st Oct 2015 5:31 am 

    “The Smart Money Is Still Betting Against Crude Oil”. For those few that don’t understand how the futures market works: for every player who is betting that those future price estimates are correct there’s another futures player betting that they are wrong. Who is the smart money will be determined when those contracts reach maturity subject to which side of the bet has to write a check to the other side. For every $ made on a futures contract someone loses a $. Actually a little less than a $ is won because of brokerage fees.

  7. BobInget on Wed, 21st Oct 2015 8:55 am 

    Boeing profits increased 18% Y over Y.
    It seems their new all electric civil airliners
    (the E210V) are selling like crack on Friday.

    Boeing Co (NYSE:BA) reported better-than-expected earnings for third quarter fiscal year 2015 (3QFY15), and is trading up 4% in pre-market hours. It reported total revenue of $25.85 billion, beating the $24.68 billion consensus estimate by 9%.

    The aerospace company attributed the increase in revenue to record commercial deliveries in the quarter. The total commercial deliveries increased 7% from 186 to 199.

    Poster’s note:

    The cure for low oil prices is ?
    Low oil prices.

    Because airlines are profiting on low oil prices today seems to engender all sorts of optimism about the future and stupid, stupid
    people like Forbes who want to make a name for themselves in this world of asinine predictions.

    The era of low oil prices ended on October 21, 2015 to almost no notice.

    best to all, bob inget

  8. BobInget on Wed, 21st Oct 2015 9:03 am 

    API is calling for storage of 7.5 million barrels.
    This, against a backdrop of 9.2 million surplus last week. EIA report to confirm as much will show up in 30 min. I’ll post it here,
    in the mean time oil is selling off big time on
    news of all this oil we can’t ever use as it past its expiration date of 24 million years two hours ago.

  9. BobInget on Wed, 21st Oct 2015 9:26 am 

    http://www.bloomberg.com/news/articles/2015-10-21/saudis-risk-draining-financial-assets-in-five-years-imf-says

    Saudi Arabia may run out of financial assets needed to support spending within five years if the government maintains current policies, the International Monetary Fund said, underscoring the need of measures to shore up public finances amid the drop in oil prices.

    I don’t think IMF is accounting for costs of Saudi wars in Yemen, Syria, etc.

  10. BobInget on Wed, 21st Oct 2015 9:32 am 

    Summary of Weekly Petroleum Data for the Week Ending October 16, 2015

    U.S. crude oil refinery inputs averaged over 15.3 million barrels per day during the week
    ending October 16, 2015, 78,000 barrels per day more than the previous week’s average.
    Refineries operated at 86.4% of their operable capacity last week. Gasoline production
    decreased last week, averaging 9.6 million barrels per day. Distillate fuel production
    increased last week, averaging over 4.7 million barrels per day.

    U.S. crude oil imports averaged 7.5 million barrels per day last week, up by 156,000
    barrels per day from the previous week. Over the last four weeks, crude oil imports
    averaged about 7.4 million barrels per day, 2.7% below the same four-week period last
    year. Total motor gasoline imports (including both finished gasoline and gasoline
    blending components) last week averaged 709,000 barrels per day. Distillate fuel imports
    averaged 58,000 barrels per day last week.

    U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum
    Reserve) increased by 8.0 million barrels from the previous week. At 476.6 million
    barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at
    least the last 80 years. Total motor gasoline inventories decreased by 1.5 million barrels
    last week, but are above the upper limit of the average range. Finished gasoline
    inventories increased while blending components inventories decreased last week.
    Distillate fuel inventories decreased by 2.6 million barrels last week but are in the middle
    of the average range for this time of year. Propane/propylene inventories fell 0.6 million
    barrels last week but are well above the upper limit of the average range. Total
    commercial petroleum inventories increased by 1.5 million barrels last week.

    Total products supplied over the last four-week period averaged about 19.4 million
    barrels per day, up by 1.0% from the same period last year. Over the last four weeks,
    motor gasoline product supplied averaged about 9.1 million barrels per day, up by 3.1%
    from the same period last year. Distillate fuel product supplied averaged over 3.8 million
    barrels per day over the last four weeks, up by 5.2% from the same period last year. Jet
    fuel product supplied is up 6.8% compared to the same four-week period last year

  11. Davy on Wed, 21st Oct 2015 9:35 am 

    Bob, industry profit claims all need to be suspect with all the accounting games being played. It is all about stock price maintenance. You as an investor should know that.

  12. Davy on Wed, 21st Oct 2015 9:39 am 

    If Caterpillar’s Data Is Right, This Is A Global Industrial depression

    Most cats bounce at least once when they die, but not this one: after CAT posted its first annual drop in retail sales in December of 2012, it has failed to rebound even once. In fact, since then Caterpillar has seen 34 consecutive months of declining global sales, and 11 consecutive months of double digit declines.

    Why is this important? Because a month ago we asked: “What On Earth Is Going On With Caterpillar Sales?”

    We have been covering the ongoing collapse in global manufacturing as tracked by Caterpillar retail sales for so long that there is nothing much to add.

    Below we show the latest monthly data from CAT which is once again in negative territory across the board, but more importantly, the global headline retail drop (down another 11% in August) has been contracting for 33 consecutive months! This is not a recession; in fact the nearly 3 year constant contraction – the longest negative stretch in company history – is beyond what most economists would deem a depression.

  13. BobInget on Wed, 21st Oct 2015 9:46 am 

    WOW… eight million barrel surplus.
    Almost everyone forgets about refinery (86.4)
    shutdowns this time of year.Traders have memories that go back as long as an hour.

    If you were looking for bullish news, read only the final paragraph.
    Gasoline consumption..+ 3.1%
    HO up 5.2% (diesel)
    Jet fuel a whopping 6.8 % higher.

    This entire exercise, storage, is meaningless when it comes to times like today when speculators, refineries are stashing cheap oil, ‘just in case’. Well guys and girl, that ‘case’ is coming to hand sooner then later.

  14. BobInget on Wed, 21st Oct 2015 9:56 am 

    Davy, Who ya gonna trust?
    CAT sales are indeed lower.
    Does this have anything to do with lower commodity prices, think?

    Because CAT share prices are lower, dividends are higher:
    Caterpillar, Inc.

    CATwill begin trading ex-dividend on October 22, 2015. A cash dividend payment of $0.77 per share is scheduled to be paid on November 20, 2015. Shareholders who purchased CAT prior to the ex-dividend date are eligible for the cash dividend payment. This represents an 10% increase over the same period a year ago. At the current stock price of $70.27, the dividend yield is 4.38%.

    Read more: http://www.nasdaq.com/article/caterpillar-inc-cat-ex-dividend-date-scheduled-for-october-22-2015-cm532761#ixzz3pDMEKN9n

  15. BobInget on Wed, 21st Oct 2015 10:04 am 

    Davy, Should I slit both wrists in a hot bath,
    breathe only Helium for eternal bliss?
    Alternatively, Buy CAT for an ample dividend and wait for mining, farming, housing, maritime, crude, to recover.

  16. ghung on Wed, 21st Oct 2015 10:18 am 

    I wish some of you would do a better job of defining quotes from other sources (how hard is it to use quotation marks at least), and using links to sources. It’s usually illegal to not do so, and it makes it easier for the readers. Just sayin’…

  17. ghung on Wed, 21st Oct 2015 10:20 am 

    Some of you could also bone up on your HTML as well. Plenty of primers out there.

  18. ghung on Wed, 21st Oct 2015 10:22 am 

    For the HTML-challenged, the old Oil Drum still has a help page:

    http://www.theoildrum.com/filter/tips

  19. Davy on Wed, 21st Oct 2015 10:36 am 

    bob, this is across the board bad for cat. And no, don’t cut your wrist just moderate your corn porn and I will shut up. I try to put water on fire when I see it.

    G-man, if you are referring to me I am in the field on my IPhone and it is a bitch to do comments. When in the cabin on my laptop I try to be proper.

  20. BobInget on Wed, 21st Oct 2015 11:54 am 

    CAT
    71.82
    +1.55 (2.21%)

  21. Davy on Wed, 21st Oct 2015 12:06 pm 

    Bob, Cat is cutting 10,000 people Wall Street likes to see these actions. I imagine that may play a role in their stock going up.

  22. shortonoil on Wed, 21st Oct 2015 6:59 pm 

    CAT has been the world’s industrial Bell Weather for the last half century. It is a fair statement to say that when CAT is not doing well, the world is not doing well. CAT is doing awful!

  23. shortonoil on Wed, 21st Oct 2015 7:43 pm 

    “Prepare for a “stimulating” 2016-17 (to 2018-20?), a deficit/FS of ~15-16% (SAAR) at some point, and the Fed’s balance sheet at, or near, 40% of FS and approaching ~100% of bank loans less inter-bank loans, charge-offs, and delinquencies, i.e., effectively no fractional reserve lending at that point.
    Ready, gents?”

    The prevelant interest rate represents the time rate of change for the value of money. ZIRP is an admission by the FED that their currency now in circulation has zero future additional value. That there is no growth potential for that money. Without growth existing debt can not be serviced. Adding more currency to the system can only result in additional debt formation that can not be serviced. The FED is now printing the system into an unavoidable debt catastrophe. When defaults reach the sum total of all currency in circulation the system has collapsed. Q.E.D.

  24. MrNoItAll on Wed, 21st Oct 2015 8:30 pm 

    “The FED is now printing the system into an unavoidable debt catastrophe.”

    If we accept that TPTB and the financial/corporate elite knew quite a while back that the current system was destined to crash and burn, taking billions of lives with it, then the FED’s and the financial/political elite’s actions since 2008 all make a lot of sense. They’re squeezing the economy for all it’s worth, grabbing what they can, no doubt funneling that money into preparations for what they believe comes “after” the big meltdown. But in the meantime, they pretend that they’re trying to save the economy and they feign concern for the huddled masses. Buying time is all they’re doing, and biding their time. There is no way that they didn’t see this end game coming a long time ago. You know that. I know that. But a lot of people do NOT know that.

  25. Sissyfuss on Wed, 21st Oct 2015 9:12 pm 

    Rockman,are you saying there has to be a winner and a loser in every futures transaction in the wonderful world of emulsified dinosaurs? That seems as predatory as the world they knew.

  26. Sissyfuss on Wed, 21st Oct 2015 9:20 pm 

    Paul Ryan says willing to one for team, seen bent over with pants down in Boner’s, er, Boehner’s orifice,er, office.

  27. Sissyfuss on Wed, 21st Oct 2015 9:59 pm 

    Sorry, take one for team. Go Pauly,Go Pauly.

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