In recent posts, we have looked at crude oil as a long-term sell and we have seen some weakness but expect far more to come and see crude oil as a good risk to reward sell on rallies. Our view of the fundamentals, sentiment, and technicals is enclosed.
Crude oil moved up over 40% in 2021 before starting to move lower recently – the media talk about the bullish supply and demand fundamentals but the rise was mostly due to speculation as traders bet on the reflation trade. Over 70% of oil volatility over history is caused by speculators and if they were banned from the market it would hardly move.
Reflation Trade To End
Global growth will shortly peak and optimism has peaked which we can see on the chart below:
Speculative Long Interest Down
Speculators at present are not taking crude oil longs. The latest CFTC data on NYMEX shows crude oil spec longs up just +1,000 lots with CL higher by $4.23/bbl or +6.2% on the bounce off on last weeks “smokespec monday”. Open interest is down -232k lots or -9.1% since the mid May. If speculators are not coming in to go long will they now consider the short side?
USD and Stock Markets To Impact on Crude Oil
We are expecting a stronger USD as the Fed move towards cutting stimulus and a stronger USD is bearish for crude oil. Also, stocks have been a huge bull market and crude is normally bought as a proxy to stock market strength but this relationship has broken down – If we were to see stocks fall this would weigh on crude oil.
Technical analysis
The weekly chart shows the huge rise in crude oil and we expect crude to correct to the 60.00 level but if we were to get risk off we would expect a move down to 50.00 with a possible run on to 40.00. On the daily chart after topping out we have seen 2 x rallies with the second lower than the first and we view this as bearish. Any rallies to resistance are selling opportunities in our view – we view crude oil as a good position trade for trend traders
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