Crude Gains on Monday, but Bullish Sentiment Fading Fast

The net length in Brent has fallen to its lowest level for 55 weeks. File Image / Pixabay

With the impetus for crude trading inextricably linked with sentiment over geopolitical concerns, it wasn't surprising that news of China and the U.S. planning to hold trade talks this month caused both benchmarks on Monday to reverse the recent trend of losses and post modest gains.

However, one noted analyst pointed out that the market is seeing fewer bulls than ever and that this phenomenon isn't expected to fade any time soon.

West Texas Intermediate on Monday settled up 52 cents to $66.43 per barrel, while Brent rose 57 cents to $72.40 per barrel.

This was in stark contrast to last week, which saw Brent and WTI declining  for a third and seventh week consecutively, mainly due to fears that an economic slowdown would come from the mounting U.S. and China trade war; but the two governments have agreed to hold talks in an effort to resolve the conflict.

Even though U.S. president Donald Trump has vowed not to relax his effort to eliminate tariffs and non-tariff barriers and quotas as well as halt theft of intellectual property - all of which China is said to be guilty of - Brian Kessens, portfolio manager and managing director at Tortoise, remarked, "Anything that reduces those tensions, you can see oil generally move back the other way."

Also supporting crude prices were the U.S. sanctions against Iran, and despite Iranian officials on Monday asking the European Union to step up efforts to save the nuclear deal that the Americans junked, JBC Energy suggested it was unlikely to happen: "We continue to believe that despite all of the political goodwill that may exist in Europe, there is no practical way that many of the sizeable European buyers of Iranian crude can be protected from U.S. sanctions," it explained in a note.

But international tensions notwithstanding, the numbers strongly indicate the bullish sentiment that fueled remarkable gains for crude earlier this year has all but evaporated: John Kemp, specialty energy and commodities analyst for Reuters, on Monday wrote that hedge funds and other money managers cut their net long position in the six most important petroleum futures and options contracts by 69 million barrels in the week to August 14.

He pointed out that "Portfolio managers now hold a net position of just 952 million barrels, down from a peak of 1.484 billion in January, and the lowest since September 2017"; also, "Portfolio managers have cut their net long position in Brent in 13 of the last 18 weeks, by a total of 296 million barrels."

This means that net length in Brent has fallen to its lowest level for 55 weeks and close to their lowest long positions in 24 month, unwinding most of the increase since prices started to rise in July 2017.

Kemp concluded succinctly, "If the outlook for the global economy and oil consumption deteriorates, there is still scope for funds to add short positions and push prices lower."

For those inclined to predict crude's price trajectory, it seems the safest option is for them to cover all bets even for short term forecasts; thus, last week Tom Kloza, co-founder of the Oil Price Information Service, warned that crude futures are so volatile that a slump to $50 or a spike above $100 per barrel could not be completely ruled out in the near term.