Crude Creeps Up Amid Warnings of a Sharp Short-Covering Spike

Concern has been voiced about what happens in September when demand diminishes.

More worries accompanied a rise in crude prices on Wednesday, as a small weekly decrease in U.S. production (100,000 barrels per day) caused West Texas Intermediate to settle up 50 cents to $44.74 and Brent to settle up 66 cents to $47.31 per barrel.

While the media made much of the production decline, Stephen Schork, president at The Schork Group, told Bloomberg television that it's "silly" to try and predict the ebb and flow of inventories on a weekly basis," with the result being further market confusion and questionable activity on the part of traders.

He said that instead "you have to look at the seasonal trends," and in this regard, with the summer driving season underway, he says the report of falling inventories "is a push, neither bullish nor bearish."

Also taking the seasonal perspective, Schork is worried that oil has dropped $9 over the past few weeks: "this has to be a concern for the bulls because oil demand has never been stronger ... your concern now is, what happens in September?"

Schork is referring to the likelihood of 1 million bpd taken out of the market over the next two months, coinciding with well-hedged producers continuing to add barrels to the market: "that is your biggest concern for the oil bulls at this point."

Bloomberg on Wednesday reported another concern, that of so many bearish bets currently on the market rendering prices vulnerable to a sudden, sharp turnaround; Mike Wittner, head of oil market research at Societe Generale SA, said, “The positioning clearly says there is room for a fairly abrupt reversal: the gross short positions are very big.

"Sentiment is overwhelmingly bearish right now, but things can turn around in a hurry.”

Richard Fullarton, founder of Matilda Capital Management, added, “The world was getting mega bearish so some of the new shorts will be washed out; I can’t see a rally having legs unless something fundamental changes, it’s just a better entry point for shorts.”

For the record, short positions held in Brent were reported to have risen to 169 million barrels last week, the highest since records started in 2011.

The question is, what can be done at this stage to improve market conditions over the long run?

John Kemp, senior market analyst, commodities and energy for Reuters, wrote on Wednesday, "If all oil producers try to maximize their output, the result is a glut of crude that depresses prices and proves ruinous for everyone; if one producer acts as swing producer and restricts output unilaterally, others increase their production to fill the gap, and the only result is a loss of market share.

"The only rational strategy is to avoid trying to manage production and allow prices to adjust to rebalance the market."

Kermp suggests that the current production cuts undertaken by the Organization of the Petroleum Exporting Countries should not be renewed when they expire next year, and Saudi Arabia and others should commit to gradually normalizing production levels in 2018: "The result would likely be somewhat lower oil prices in the near term, but that would curb the shale boom and protect Saudi Arabia’s market share and revenues in the medium term."

Without offering specifics, Tim Dove, CEO of Pioneer Natural Resources Co., earlier this week suggested that the Saudis won't be saddled with diminishing market share and lousy prices for long: "they cannot have a scenario, which is $43 or $44 oil, and sustain their national budgets."