Monday, August 15, 2016

Crude Oil - Bullish Reverse Has More

Less than two weeks ago on August 2nd as Crude Oil prices were still falling, many voiced concerns that oil prices would return to earlier year lows.  Seeing instead, fundamental reason for stronger H2 economic growth on the back of inventory rebuilding and a technical condition that screamed oversold, I wrote (‘Crude Oil Bear Market May Have Already Ended’) indicating that oil prices had likely put in a bottom and would soon recover more than 10%.  From below $40 and in less than 2 weeks ago, crude oil has advance above $45.50 or roughly 15%.  While oil is clearly no longer ‘oversold’, it is also not showing any signs of technical weakness or giving any reason to expect an immediate bearish reverse. 


On the session following the report noted above, oil advanced above the downward sloping trend channel represented ($39.71) and confirmed, for the conservative investor, that the bearish trend had been reversed and recovering price action was likely.   Prices have steadily advanced since the bullish reverse with only modest pauses, gives reason to expect that further gains can be achieved. 


Looking to positioning conditions, we would note that CFTC described ‘non-commercial’ accounts have reduced their net short position slightly over the last two reporting periods, advancing from -114K to -103K.  This helps us to understand that the level of net short positioning for this, sometimes called ‘large speculator’ community, will likely continue to be reduced and provide additional support for oil prices.  These account types had increased their net short by over 160% from mid-June to early-August and that jump in bearish positioning was an additional warning at that time for a bullish reverse.


Going forward, we should expect some resistance toward $46-48.  We should be watchful for the additions to new session highs without a pause as this could warn eventually of growing overbought conditions.  There has been 8 new session highs since the August 2 low and this is a situation we will continue to monitor, but do not see it currently as strong warning of overbought conditions.  At present, this is not a concern and with wrong-sided hedge fund community short positioning strategies still in place, we expect further bullish advance. 


Finally, economic data has not been on the whole robust over the last two weeks since the earlier bullish report on oil was published.  In particular, retail sales came in below estimates and while the data there was revised still higher from an already strong report in the prior month, we would have been more comforted in our analysis had there been a string of strong retail sales reports.  It is inventory building in H2 brought on by continued strong consumer demand that is expected to drive greater growth.  Without stronger consumption, that growth and therefore increased demand for energy (oil) will not likely materialize.

For now, technical and positioning conditions are expected to carry oil prices still higher.  Over the coming weeks and months, it will be imperative that economic growth recovers in order for oil prices to have a lasting bullish advance. 


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