Nothing Runs Like a Train

By: Mike Dombroski / February 9, 2018

All aboard the bearish freight train. March WTI trades lower by $2.27 to $58.88/barrel today as the bulls have been scrambling to the exits all week long. WTI started this week at $65.45, but just like the stock market, it is been a bearish freight train as bullish hedge funds have been selling their positions, accelerating the selloff.

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We’ve mentioned in past blog postings that record crude oil length can lead to sharp price corrections and this is exactly what we’ve seen since Monday. This has coincided with a stock market sell off; which could be the worst week in 9 years for equities. In the oil space, there are three reasons that we can examine to justify this sell off.

Firstly, let’s talk in further detail about the record bullish positions in oil. Last week, the CFTC reported that hedge funds had a record net long crude oil position of 716,659 contracts. This record net length makes the market highly susceptible to sharp price corrections as soon as there are bearish catalysts.

Speaking of bearish catalysts, the second reason we’re experiencing a selloff is because of bearish oil fundamentals the market is digesting over the past two days. The DOE petroleum inventory report on Wednesday said current U.S. domestic oil production now stands at 10.251 million barrels per day, the highest since 1970. Remember, as oil prices rallied into last month, it gave producers the opportunity to hedge their production price out on the futures curve for months, if not years from now. Therefore, it allows them to feel comfortable to increase oil production knowing that they’ve locked in profits. The oil market also digested bearish news on Thursday when Iran said it would increase its production to at least 700,000 barrels per day within the next four years. Iran is a member of OPEC and this sends mixed signals to the market as OPEC tries to stick to its production cut quotas. It seems OPEC’s infamous problem of compliance may happen again and is thus giving the oil bears reasons to growl.

Lastly, the stock market sell off is causing significant headwinds for the energy space. The major U.S. stock market indices are off about 10% from their highs in just the last week. This sharp, quick correction in equities can be quite toxic for all asset classes because of margin calls. A margin call occurs when a brokerage requires an investor/institution to put up more capital in their account to maintain a position that has suffered losses. Basically, some investors don’t have enough free capital to cover their losses in equities so they have to sell positions to raise cash. This means that hedge funds could be selling their record long oil positions to cover some of their positions in equities creating a waterfall effect on all assets.

Also keep in mind that we are entering turnaround season for refineries. This means that they are not taking in as much crude oil as they normally do so demand has tapered off. So let’s be aware that we are in a period of volatility, even though Goldman Sachs said on February 1st it expects Brent crude oil to trade above $80/barrel within six months.

March Brent crude oil currently trades down $2.24 to $62.57/barrel, ULSD is lower by $0.0701 to $1.8512/gallon, and RBOB is down by $0.071 to $1.694/gallon.


Categories: Daily Market Update


Mike Dombroski

Written by

Mike Dombroski


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