March 4, 2018
Oil rallied on Monday along with the stock market and then fell sharply with the stock market Tuesday through Friday. We have been calling for oil to trend lower in the next month, so let’s see if that action starts next week.
While OPEC and some non-OPEC countries promise to cut production, most non-OPEC countries, with the US leading the way, are ramping up production. The following chart is from the International Energy Agency (IEA) and shows how the US production has climbed to over 10.283 mb/d, an all-time record high!
Not only is the US ramping up production, they are also pouring money back into explorations. Last week producers added 1 new rig, now totaling 800, the highest rig count since April 2015, up over 139.5% from the January 2016 low of 334.
There are many supply and demand factors that affect oil prices. Reports on production/supply and demand are reported regularly by the mass media, and it is that reporting that most investors base their decisions as to where the price of oil is headed.
The problem for the mass investors and most hedge funds is that while they must wait for these reports and forecasts to be published, the large producers and merchants have already acted on the data. These large producers and merchants are the source of most of this data, so they know the numbers before they are published.
The reality is that while the mass investors and hedge funds simply do not have the capacity or contacts to access this data in a timely fashion, there is a way we can see what the large producers are doing with the data they have. We can watch what these Commercial Insiders are doing by looking at the Commitment of Trader (COT) data.
On the COT chart below, the Commercial Insiders are the red line, while the Large Speculators are the green line. As we zoom in we can see that the Commercials have been massively selling to the Large Speculators. In fact, the Commercial Insiders are currently at the most bearish net short position EVER! At the same time the Large Speculators are at their most bullish net long position EVER!
The last time we had a spread this wide oil had a severe correction (red arrow). Understand that the speculators almost never win these battles.
There are four important Support and Resistance levels to keep your eyes on:
- Near-term Resistance sits at 62.00
- Key Resistance sits at 67.00
- Near-term Support at 58.00.00
- Key Support sits at 52.00
Bullish scenario: Should oil close this week and hold above the 62.00 level, it would be bullish, and would suggest we could see 67.00 oil by the end of February
Bearish scenario: If oil breaks down below 58.00, it will be bearish, suggesting we will see 52.00 by month-end and sub 50.00 oil in Q1/18.
Our current forecast: Based on supply and demand, and given that we are now ending the summer driving season, our models favour the bearish scenario and are calling for sub 58.00 oil in the next month, with the ultimate low likely in the sub 50.00 range in Q1/18.
The bottom line is there is a glut of supply versus demand. Add in the record levels of speculative extremes, combined with the risk of OPEC members failing to comply with their quotas, the potential for a plunge in prices is much higher than most investors are prepared for.
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