Thursday, July 5, 2012

Ready for a big move for oil? (Black Swan Capital)

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Short squeeze over? Crude oil fundamentals to overwhelm geopolitics ...

To some degree, it seems Saudi Arabia is alleviating some geopolitical premium in crude prices, as the world's top producer has not pared back its production despite a pullback in demand. And that pullback in demand is very real -- China, the second largest energy consumer in the world, is seeing its gasoline refiners cut runs by 2% per day to trim back inventories. This comes on the back of a dip in Chinese crude oil demand in April (first in 3 years or so), followed by only a tepid rebound in May. And since we think the global economy is still downshifting, crude oil demand is likely to remain a weight on price.

Traders have become well aware of these bearish fundamentals. So aware, the speculative short position in crude oil futures recently grew to the largest since September 2011. This suggests the magnitude of the move we saw in the past few trading sessions has more to do with short positions getting squeezed than it does with geopolitics. Is the squeeze over? 

5min and Daily charts of crude oil

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