Hedge funds double their short crude oil bets

Crude Oil, Monthly

Brent crude fell over 4% in logging a new 12-year low at $27.70 (WTI low was $28.36) in the March futures contract during the Asian session today, and is presently sitting in the low $28s. The lifting of sanctions against Iran has been the latest selling prompt amid forecasts that this will lead to an increase of 500 kb per day of crude entering the market this year (according to Barclays, cited by the FT). This will add to an already pronounced supply overhang. The recent Morgan Stanley forecast for $20 oil is starting to look reachable.

The price of crude oil has been moving lower with selling pressure related to several fundamental factors. Markets have been worried about slowing growth in China and diminishing demand of oil as the global economic growth is slowing down as well. However, the slide has had more to do with supply than demand. The inventories have been high with production staying at elevated levels even though the rig count has come down significantly. Now the news of Iran embargo and sanctions being lifted has intensified the bearish bets in the oil markets. According to Bloomberg, hedge funds have doubled their bearish bets in the oil markets over the last two weeks. Also, OPEC supply has been on the increase as it has defended the market share and tried to drive US producers out of business.

In the long term picture WTI Crude is near 2003 lows with the next monthly support level at 24 dollars while there are significant resistance levels relatively close at 33.20 (year 01/2009 low) and 37.75 (08/2015).



Crude Oil, 240 min

Since January 8th the WTI crude oil futures market has been tied into a bearish channel. After making a new low during the Asian session today crude has rallied a bit and is not far from a resistance at 29.93. Another potential resistance area is near 30.72 level where the bear channel top, 30 period SMA and 23.6 Fibonacci level coincide. Should the market manage to rally even higher and beyond the channel, the 31.42-32.10 area where the upper Bollinger Bands, the 50 period SMA and 38.2% Fibonacci retracement coincide could be a level where the market turns lower again.

Conclusion,

Market is trending lower which is a reason to look for low risk selling opportunities. Potential short entry levels are: 29.94, 30.72 and an area at 31.42-32.10. We are interested in shorts if market hits these levels and provides us with sell signals.  The market being in the downtrend it makes sense to have both a short term target (Target 1) and a target that is a bit further away. My targets for WTI crude are: Target 1: 28.88 and Target 2: 25.20