In a post dated July 7th and titled “A Range By Any Other Name…” , we noted the tendency for crude oil to stay withing in range. We wrote “Notice in the chart how most of the last 5 years have been spent within ranges. They have often been very wide, but still within a range. Also, notice how as the range tightened, volume increased. Speculative traders always want to play range breakouts for big gains but with crude, the range is the normal state of things” and we attached the following chart to the article.
OPEC’s crude oil production expectations showed a surprise surge. According to a forecast by consultancy Petro-Logistics (who has some unique, but accurate methods of forecasting crude production including monitoring tanker shipments), OPEC’s crude oil production is expected to increase by another 145,000 barrels per day in July over June levels, driven by higher production in Saudi Arabia, Nigeria, and the UAE. These guys are supposed to be in the midst of a production cut lead by Saudi Arabia, aren’t they?
This increase would put OPEC over 33 million barrels per day (bpd). Last week OPEC themselves estimated their average production at 32.61 million bpd. According to the International Energy Agency (IEA), OPEC members compliance with the agreed upon production cuts slipped in June to 78%, from 108% in May!!! The timing of this information is terrible for the crude oil bulls, given that US drillers have finally shown some slowing, with Bakers Hughes oil rigs counts actually falling by 1 on Friday after only having risen by 2 the previous week.
Speaking of the crude oil bulls, according to this weeks CFTC Commitment of Traders report, the net long speculative crude oil position rose 38,400 contracts to 396,500. Speculative longs added 23,000 contracts to the total long positions reported. Spec long open interest now stands at 652,000 contracts. In the same time period short open interest was reduced by 15,400 contracts, making the new total speculative short position only 255,600 contracts. Since the report is dated July 18th that means prior to last week’s lower close and big Friday’s selloff, longs outnumbered short in crude oil by just over 2.55/1. Lastly, open interest is at a short-term cycle high. It’s nothing crazy, but it may point to a flattening, then a dip to levels that usually indication position squaring, which could mean longs exiting and lower WTI crude prices (see chart below).
This is the same chart as in the previous post, zoomed in and with updated pricing. So we know where the selloff may hold, but the next move could be an expanded range lower, with longs covering their losses by selling prices below the green support line. Don’t expect a trend-style move lower however even though crude is in a technical bear market. Remember, crude oil likes a range. Sometimes it expands, but it’s still a range.