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Gains in Energy Complex Slow Over US Production and Speculative Positioning Concerns

Concerns over higher US oil production and a crowded speculative market put the breaks on any price gains in WTI for the last week and a half. For the week ending 1/14/2018, US production rallied to 9.75 million bpd from lows near 9.50 million bpd. Current production is just below recent highs at 9.789 million bpd. The EIA expects US crude oil production to exceed 10 million bpd in 2018 and 2019. Most of the growth in production is expected to come out of Permian region. Net positioning for hedge funds in NYMEX WTI futures increased by 51,179 contracts to 483,829. The hedge fund ratio jumped to 16.70, which is the highest reading in the indicator from 2006 onward.

Short-term momentum in WTI has shifted to the downside as the 2-Hour adaptive moving average (AMA) has crossed below the 5-Hour AMA. Within the last two weeks, price crossed above a major area of resistance that was formed on 05/06/2015 but follow through has been limited. Given the extreme reading in the hedge fund ratio and rising US production, we think a corrective move lower is likely as hedge funds start to book profits. In the event of hedge fund liquidation, we expect WTI futures to target $60-$59 for starters. A significant break above $64.50 would invalidate this assumption.

ULSD short-term momentum has also shifted to the downside with the 2-Hour AMA crossing below the 5-Hour AMA. Since the end of December, price has remained in a tight range between $2.04 and $2.09-$2.10. If price breaks below $2.04, we expect ULSD futures to target trendline support at $1.98-$1.99. If the trendline fails to hold, price should target support levels near $1.94-$1.95.

Net hedge fund positioning for NYMEX ULSD decreased in the prior week by 1,486 contracts to 93,817. The hedge fund ratio increased to 8.51 from 8.28 as the number of short contracts fell to 12,490 from 13,088. Like WTI, ULSD futures remain significantly overbought according to speculative positioning.