Hedge Funds Hold Net Positioning Steady Despite Fall in Crude Prices

Economic Indicators:

FOMC Meeting Minutes from January 31 meeting: February 21 @ 2:00 pm EST

GBP Gross Domestic Product 4Q: February 22 @ 04:30 am EST

JPY National Consumer Price Index: February 22 @ 6:30 pm EST

CAD Consumer Price Index: February 23 @ 8:30 am EST

Energy and Global Markets

The US Dollar and equity markets remain in the driver seat for crude oil and product pricing with traders eyeing a reduction in market volatility and a weakening outlook for the dollar. The long-term trend for the US Dollar Index (DXY) remains bearish, but recent price action is catching a bid following a failed test of support near $88.50. With major economic news scheduled for the duration of the week, we could see volatile days ahead for the dollar. The economic events listed above are widely followed by traders and have historically high levels of volatility after the release of the headline figures. A range of short-term resistance for DXY exists between $90.00 and $90.50. On the longer-term, DXY has a major area of resistance at $91.00 which is the 2017 low formed on September 8.

The fundamental environment for crude and products is bullish over the long-term as OPEC reports continued draws on global inventories. Inventory reports out of the US remain contradictory as we’ve seen three weeks of consecutive builds as the rig count makes new highs. If trends continue, we’ll likely see another build in US crude for the week ending 2/16. The weaker dollar has been a boon for crude prices, but it may be time to start looking for price to go range bound as it did between 2015 and 2017. Minister of Energy of Russia, Alexander Novak, sees price trading range between $70 and $50 going forward.

On the short-term technical side, WTI futures are running into selling pressure at the $62 handle. Short-term momentum has flipped bearish both on the daily and intraday time frames. We are looking for price to stabilize above $61.00 and break out above highs near $62.60 to signal a resumption of the bullish trend. If inventories continue to build and we see an extended recovery in the dollar, we could see price trade back toward $59.00. As always, weekly inventory estimates will give us a good idea on future price action.

Further on the technical side, hedge fund positioning for crude oil remains high despite the significant selloff in price. The Hedge Fund Ratio saw a drop to 14.13 two weeks ago but has since climbed back to 16.32 as reductions in the number of short contracts outpaced the reductions in long contracts. The unwillingness to book long profit and add to short positions indicates hedge funds maintain their long bias. Hedge funds have been steadily reducing their short positions since October 2017. The number of short contracts on WTI futures now stands at 29,270.

Venezuela

In a desperate effort to generate capital for the ailing country, Venezuela’s government has launched its Petro currency that was announced at the end of last year. The Petro will be tied to the price of crude oil and is supposedly backed by Venezuela’s proven oil reserves, which are considered the largest in the world. Venezuela intends to offer a total of 100 million tokens with an initial offering around 38 million. The US Treasury Department issued a warning intended for US citizens and businesses, indicating that purchases of Petro could be in violation of current US sanctions. Market participants are expressing concern over the digital currency and Venezuela’s transparency surrounding the offering. The cryptocurrency community views cryptos such as Bitcoin and Ethereum as ways to wrestle monetary control from governments. This distrust from crypto enthusiasts and warnings from the Treasury Department could dampen public interest. That said, there are numerous organizations and country’s worldwide who are not concerned with US sanctions and the moral foundation for cryptocurrencies. North Korea, for example, is one of the largest holders of Bitcoin and has been tied Bitcoin thefts in the past.

Our concern is that the offering of Petro is a last-ditch effort to raise capital. If the currency fails to take off, Venezuela may be out of options and its crude industry may edge closer to collapse. Analysts are already expecting a further decline in Venezuelan production this year with a target near 1.4 million bpd. At the end of January, Venezuelan production was estimated to be 1.6 million bpd.

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