We have seen before how machines, or more precisely the algorithmically programmed computers, are increasingly responsible for setting prices in the WTI futures pit. The algos feed on news flow, but don’t seem capable of being able to distinguish between quantitative news and qualitative news. The most recent run in WTI from just over $47 at the end of March to just under $53 today (an almost 12 percent move in roughly two weeks) is a case in point.
It’s getting harder to provide any sort of rationale for moves of this magnitude. Or is it even profitable to continue looking for one? For WTI, it’s really an existential question.
The news flow has focused on speculation that OPEC production levels would continue to decline and even be extended into the second half of this year. Helpful and timely comments from Saudi Arabian sources suggesting as much were clearly catalytic. Reports that OPEC compliance to the cuts had reached not just into the 90 percent-plus range, but had actually exceeded the planned cuts at the highly impressive level of 104 percent were also clearly supportive. The 104 percent figure was positively febrile. In addition, the EIA’s renewed but nonetheless periodic pronouncements that the global oil market would soon be in balance added fuel to the fire.
Against this backdrop of headline news (or perhaps you could call it fake news) were some more broadly based macro-economic and fundamental factors. First, the U.S. dollar index (DXY) moved up smartly with the run in WTI. That doesn’t seem to fit the bill with the prevailing orthodoxy, though that orthodoxy is not necessarily the reality. Normally, you would expect the algos to bid crude lower with a stronger U.S. dollar; in the opposite case, when the dollar is weaker, crude is bid correspondingly higher. That certainly wasn’t the case with this latest run, which is to say currency should have been a headwind to higher WTI prices, not a tail wind.
Interestingly, as WTI fell from its recent highs, the U.S. dollar as measured by the DXY has also fallen. WTI could have been expected to be stronger, but it wasn’t. It has actually been weaker in the past few days, which can easily be construed as bearish.
Second, the most recent inventory numbers issued by the EIA were bullish, as crude inventories and both categories of product (gasoline and distillates) fell in aggregate by eight million barrels. Nonetheless, crude failed to rally and actually fell.
Third, the term structure or front month/one-year contango has resumed its widening trend over the course of the past few days. Generally, traders view any such apparent shift in the term structure as bearish for WTI.
There’s an old saying in the capital markets: when a market can’t rally on bullish news, it’s no longer a bull market. So if WTI has indeed just topped out at roughly $53.70 for this run, it’s probably even odds that it’s either market fatigue or a question of mission accomplished.
In a nutshell then, I’d be inclined to think it’s a bit of both:
1) Commercial hedgers have been out in force as WTI has hit its upper band of US$52-54 to soak up the speculative futures position buying. The most recent COT (Commitments of Traders) report from the U.S. CFTC indicates that spec longs were up 7 percent for the week by just under 30,000 contracts after declining for the last couple of weeks. We’ll see how long that lasts.
2) The algos have reached their expected commodity price targets for WTI based on steep and chronic resistance at the $54 level.
3) Option price targets, particularly the cluster at the popular 50 strike in WTI, have also been achieved.
In very round numbers, a 12 percent run in two weeks equates with a 300 percent-plus return at annual rates. Maybe the machines aren’t so dumb after all.
By Brian Noble for Oilprice.com
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