The Doha meeting turned out to be a complete wash, but still, the rumour and expectation leading up to the meeting produced a massive rebound in oil prices. And while logic says that the markets should now crash because Doha failed to give us an output freeze, logic doesn’t typically rule this roost.
A downtrend ends when the bearish traders believe that the stock/commodity will not fall further and they rush to close their shorts, locking in their profits. Simultaneously, the bullish traders build long positions, believing that the prices are attractive and a rebound is possible.
However, the pullback converts into a new uptrend only when traders buy every dip and continue buying at higher levels—or else the rally peters out and a trading range is formed.
The money managers are believed to be the smart money. The direction of their bets provides important insights on the future of the markets.Related: Forget Doha. The Fundamentals Are Moving In The Right Direction
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The chart shows that the net-long position by the money managers is close to the highs of the past nine months, and the positions have more than doubled since the start of the year.Related: Oil Prices Up On Weaker Dollar, Declining Production
The CFTC data shows an addition of 20,857 net-long positions in WTI crude oil for the week ending April 12, 2016. The total net-long position is 215,630 contracts.
On closer scrutiny, one finds that the net-long positions increased due to short covering rather than the addition of new longs. The short positions decreased by 18 percent, whereas, new longs only increased by 0.8 percent.
This indicates that the traders are not confident that the markets will move a lot higher from the current levels. Hence, they haven’t formed new long positions, but they believe that the worst for the markets is over, therefore they have closed outstanding short positions.
The smart money has continuously increased their bullish bets since the Doha meeting was announced. The traders believed that the Doha meeting was the first step in rationalizing the demand and supply situation, but Doha was a non-event.
So, is the crude oil rally over? No.
Very few experts expected the Doha meeting to end in a path-breaking agreement between the OPEC nations and Russia. The consensus predicted a freeze at January levels. The meeting was never expected to alter the demand and supply fundamentals in any way.Related: Oil Back On Track As Markets Dismiss Doha
Then why did crude prices rise by more than 50 percent?
Crude plunged to a 12-year low, leaving the markets deeply oversold and due for a bounce. The traders bought the Doha rumour and closed their short positions, pocketing huge profits.
Any addition of fresh long or short positions as indicated by the forthcoming CFTC reports will provide insight into crude’s next move.
If traders show an inclination to build long positions, crude should move towards $50/b. On a build-up in short positions, oil should fall to $32-$35/b.
But if the net positions do not change materially, it is an indication that the buyers and sellers don’t consider the current level to be either over or undervalued. It will lead to a lull and crude will continue to trade in a tight range, until the fundamentals sort out and the traders are clear about the next move.
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