Crude oil: Production cuts drive short seller exodus Crude oil: Production cuts drive short seller exodus Crude oil: Production cuts drive short seller exodus

Crude oil: Production cuts drive short seller exodus

Commodities 5 minutes to read
Ole Hansen

Head of Commodity Strategy

Summary:  The energy sector has rising strongly this quarter with sentiment experiencing a major positive turnaround as aggressive voluntary production cuts from Saudi Arabia continues to tighten the market. However, the fact the bulk of recent aggressive fund buying in response to a +17% rally has been driven by short covering instead of fresh longs, show a current hesitancy about getting too extended. It highlights the risk when a rally is being driven by a political and economic movtivated production cut, and not a sustained rise in demand driven increased economic activity. With that in mind, we maintain our $80 to $90 price range forecast for the current quarter, unless the economic outlook counter to our expectations show signs of improving.

Today's Saxo Market Call podcast
Global Market Quick Take: Europe
Special Edition Podcast: A Deep Dive into Energy Markets

The energy sector, excluding natural gas, has rising strongly this quarter with sentiment experiencing a major positive turnaround as aggressive voluntary production cuts from Saudi Arabia continues to tighten the market. In addition, concerns about the global economic outlook have yet to impact demand in any meaningful way, and together these two developments have seen WTI and Brent reach four-month highs. 

Just like last year, when prices shot higher following the Russian invasion of Ukraine, the rally has been led by tight diesel markets which have sent prices for gas oil futures in London and Ultra-light Sulphur Diesel (ULSD) in New York surging to $123 and $131 dollars per barrel, the highest levels since January. In WTI crude oil, the premium the prompt futures contract, currently CLU3, commands over the next has reach a November high around 70 cents, and the tightness or backwardation of this magnitude has been adding to the bullish sentiment.

Crude oil production from the OPEC+ group of producers fell to a two-year low in July according to the latest Platts OPEC+ Survey carried out by S&P Global Commodity Insights. While OPEC pumped 27.34 million barrels/day, non-OPEC allies produced 13.1 million barrels/day, with the bulk of the reduction being driven by Saudi Arabia’s aggressive voluntary production cut which so far has been extended to include September. The one million barrel a day cut has seen the Kingdom’s production slump to a two year low just above 9 million barrels a day, some two million barrels below what it pumped last September. Ahead of their pledge to cut August exports, Russian production held steady, thereby overtaking Saudi Arabia’s position as the biggest OPEC+ producer. 

Source: Platts OPEC+ survey by S&P Global Commodity Insights

At the beginning of June managed money accounts held a 231k contract combined net long in Brent and WTI, and apart from the March 2020 Covid-19 outbreak slump, this was the lowest belief in higher prices since 2014. The Saudi energy ministers' vocal threat to hurt speculators seems to have been successful after the mentioned production cut helped drive a six-week buying spree that according to the latest Commitment of Traders Report covering the week to August 1 helped lift the combined net long by 82% to 421,000 contracts or 421 million barrels. While the WTI contract has seen the biggest jump in net length, the main driver behind the overall change has been short covering with the Brent and WTI gross short down 116k contracts to 88k, a three-month low. 

However, the fact the gross long has only risen by 74k contracts or 17% during the mentioned six-week period where prices rallied by more than 17%, in the process breaking several key technical levels, highlight a current hesitancy about getting too extended. Not least considering the rally has not been driven by rising demand but by a politically and economically motivated production cut which at best can be considered temporary. For that to change and prices move even higher, the global economic outlook needs to improve and with our CIO’s bold call for stagflation to emerge in the coming months, this according to our expectations looks increasingly unlikely. Potentially preventing Saudi Arabia from adding barrels back into the market while raising the risk of prices revisiting support, in Brent towards $82 and WTI towards $77.50. 

In Brent, the key level of support can be found around the 200-day moving average, currently at $81.54, and while looking increasingly stretched the price is currently challenging to April high at $87.50 and while having enough momentum to break it may struggle to challenge, let alone break the January high at $89. 

Source: Saxo

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (
- Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.