Correction potential in crude oil - Commerzbank

The oil price rise since end-September is to a large extent speculatively driven, said Carsten Fritsch, analyst at Commerzbank. In response to the higher oil prices, the number of oil rigs has increased in the US. Oil prices therefore have correction potential.

Key quotes

“The oil price rise of 20% since the end of September is to a large extent speculatively driven. Over the last two reporting weeks, net long positions in Brent have increased by a total of 110k contracts and have thus almost returned to the record levels from late April. On Monday, the ICE will publish new figures on the market positioning in Brent. These should suggest that speculative interest still remains high.”

“The fact that optimism among financial investors is nearly at a record high is closely connected with the prospect of production cuts OPEC has given for the end of November. Should doubts about these cuts arise and investors part with their long positions, the adverse effect on oil prices would be significant. And the higher oil prices have already had a visible side effect: Drilling for (shale) oil in the US has become profitable again.”

“According to Baker Hughes, drilling activity increased in 15 of the last 16 weeks. Since the end of June, the number of oil rigs has already risen by a good 100. This suggests that a trend reversal in US oil production is imminent. We therefore see correction potential in oil prices for the coming weeks.”