Bear Down
Crude oil closed in bear market territory as hedge funds amass the largest increase in its short position in history. Hedge funds added 56m barrels of extra short positions in Brent and WTI futures and option contracts putting bullish bets at a 5-month low.
The oil market has collapsed post-Brexit on fears that the glut of supply will be overwhelming against a backdrop of a weakening global economy. With supplies of all products at an all-time high in the U.S. and terrible growth numbers and construction numbers, the bearish momentum is building. Still, oil failed to close below $40.00 a barrel, perhaps giving the market a chance to try to stop the massive oil sell off.
With bearish fundamentals everywhere you look, what could give the market a chance at a rebound. With everyone on one side of the boat sometime things can flip. Is there any reason to believe that the selling can stop?
Oil inventories could provide a bounce. Private forecaster Genscape reported that oil supply surprisingly fell in Cushing, Oklahoma. Bloomberg has predicted an increase of 275,000 barrels. Despite record product supply, we are seeing oil supply in the U.S. start to fall. While it might not give us strong support, it may slow the fall. The Bloomberg survey shows crude supply falling by 1.75 million barrels.
They are also looking for a 1.0 million-barrel drop in gasoline supply to cut into our record stocks. With short positions at a record in gas, a draw might cause a short covering rally. Distillates are also looking for a drop of 750k.
Rig counts have been on the rise but at $40.00 that will more than likely stop. Last week we added 3 rigs according to Baker Hughes (BHI), the fifth straight week of gains. Still we may see signs that will slow as cash strapped producers put on the breaks.
Tropical storm concerns could give us a lift. The National Hurricane Center is reporting and we are listening. A strong tropical wave over the central Caribbean Sea, located about 150 miles south-southwest of Kingston, Jamaica, continues to move quickly westward at about 20 mph.
Recent satellite data indicate that the system is producing winds of 40 to 45 mph, but that it still appears to lack a closed surface circulation. Environmental conditions are expected to be conducive for additional development, and a tropical storm is likely to form later today.
While these are all great reasons, we are very oversold in these markets and while the hyper-market may continue, they may want to shake out some of the shorts.
Triple AAA reported that the national pump prices have fallen 50 of the past 51 days for a total of 25 cents per gallon. The national average price for regular unleaded gasoline has declined to $2.13 per gallon, which is the lowest level in the past 100 days and the lowest price for this date since 2004.