The International Energy Agency downgraded its forecast for global demand, as Russia begins to play up the issue of extending the duration of the agreements on the reduction of production, while oil production in the United States continues to increase, and the geopolitical conflicts in the Middle East are gradually disappearing from the front pages of the newspapers. In such circumstances, should traders not close long positions on oil? Hedge funds realized that it was time to record profit and by the end of the week by November 14 increased shorts for Brent by 8.7%. Long positions decreased by 0.1%, which eventually led to a decrease in net longs to 537,557 contracts (-1%).
Dynamics of prices and short positions for Brent
Dynamics of prices and short positions for Brent
Source: Bloomberg.
The market almost believed that at a meeting on November 30, OPEC will prolong the Vienna agreement until the end of 2018. According to the research of the consulting company FGE, this will lead to a decrease in the size of the excess of global reserves over their average values over the past 5 years from the current 140 million to 50 million barrel by the end of the third quarter of next year. As a result, prices for the Brent variety will grow to $ 65-70 per barrel. Nevertheless, participants of the market understand that the continuation of the rally will increase the risks of increasing production in the United States. Westwood Global Energy notes that the figure is growing even faster than one would expect, looking at the dynamics of drilling rigs from Baker Hughes ( it stood at 316 in mid-2016 to the current 738), as there is an increase in productivity.
This is also understood by Russian companies that are increasingly expressing dissatisfaction with the preferential terms of competitors for which participants in the agreement on production reduction have to pay. Rosneft and Lukoil postpone the implementation of certain projects due to restrictions, and the shares of the first company fall by 27% in 2017 despite the positive dynamics of oil.
Dynamics of Brent and shares of Rosneft
Source: Financial Times.
The voiced discontent of the Russian oil giants raises doubts about the extension of the deal, while the fact that this factor is taken into account in prices of both varieties, it increases the risks of a sharp drop in prices. It is better to exit now than to fall under the avalanche. Approximately in this line, hedge funds argue and begin to record profits slowly.
A political crisis in Germany also created pressure on Brent and WTI. The inability of Angela Merkel to form a coalition and the growing risks of repeated parliamentary elections put pressure on the euro, lead to the strengthening of the USD index, which in turn prevents the continuation of the rally of oil priced in US dollars. The situation may worsen if the tax reform project passes through Congress by the end of 2017. The return of interest in reflation trading , an increase in the chances of an aggressive monetary restriction of the Fed in 2018 and a strong U.S. dollar can become a real headache for bulls for Brent and WTI.
A technically successful test of support at $60.75 per barrel will increase the risks of correction development in the direction of $59.5, $59.3 and below. To continue the rally to $ 67, it is necessary to update the November highs.
Brent, daily chart
