Macro: Sandcastle economics
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Head of Commodity Strategy
Summary: Crude oil remains stuck in a tight range with Brent and WTI having struggled all month to gain a foothold above $80 and $75, respectively. However, a succession of higher lows since December, when the Red Sea crisis began, point to limited selling appetite from traders worried that geopolitical tensions in the Middle East may escalate to threaten supply from key producers in the region. A focus that has seen speculators increasingly focus on Brent at the expense of WTI. Also, today's weekly EIA crude and fuel stock report is likely to be distorted after the recent cold 'bomb' disrupted production while increasing demand for heating oil and diesel.
Crude oil remains stuck in a tight range with Brent and WTI having struggled all month to gain a foothold above $80 and $75, respectively. However, a succession of higher lows since December, when the Red Sea crisis began, point to limited selling appetite from traders worried that geopolitical tensions in the Middle East may escalate to threaten supply from key producers in the region. While such an outcome stays very unlikely, the risk has nevertheless managed to support prices which otherwise may have traded lower amid ample supply and soft demand.
In WTI, a sustained break above $75.50 could see it target the 200-day SMA at $77.6 with $80 being the next major psychological level after that. The rising trendline is currently providing support at $71.
Large money managers such as hedge funds and CTA’s have, since early December when the Red Sea crisis started, increasingly been diverging their crude oil exposure away from WTI towards Brent. According to weekly Commitment of Traders reports provided by the major futures exchanges in the US and Europe, the combined net long in WTI and Brent slumped to a 12-year low in early December at 171k contracts or 171 million barrels, with the split between Brent and WTI being 57% and 43%.
However, the combination of the Red Sea crisis disrupting normal supply routes and rising US production have since then triggered a major divergence between the two. While the general rally in crude oil from the early December lows has seen the total net long jump by 85% to 317k contracts, the split between Brent and WTI has decisively moved in favor of Brent with 72% of the total net long being Brent. Investors appear to have concluded production growth will continue to pressure prices in the United States while the Middle East conflict will provide some support for prices in Europe and Asia.
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Previous "Commitment of Traders" articles
22 Jan 2024: COT: Commodities short-selling on the rise amid China woes and Fed caution
15 Jan 2024: COT: Grains sector slump continues; Mideast risks lift crude demand
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11 Dec 2023: COT: An under owned commodity sector raising risk of an upside surprise in 2024
4 Dec 2023: COT: Speculators add further fuel to gold rally
20 Nov 2023: COT: Crude selling slows, grains in demand
14 Nov 2023: COT: Crude long slumps; agriculture sector in demand