Crude oil weakness adds focus to upcoming OPEC meeting

Weekly COT update: Crude oil long slumps; agriculture sector in demand

Key points

• Crude oil sees fresh weakness after failing to respond to the post-CPI sentiment boost across other markets
• Despite IEA and OPEC calls for robust demand growth, prices are under pressure from momentum selling funds
• Traders may consider the risk of additional action to support prices when OPEC meets on November 26

Crude oil trades lower for a third day with fresh selling emerging after prices failed to reach safer grounds earlier in the week when global stock markets and general risk appetite surged after an unexpected slowdown in US inflation once again increased bets that the Federal Reserve’s rate hiking cycle is over. The prospect for lower funding cost supporting liquidity intensive industries drove a strong rebound in some growth dependent commodities, but not crude and it highlights the current loosening of conditions.

The oil market focus has instead been turning to the short-term demand outlook which according to the futures market is showing signs of weakening. Most notable in WTI where the spread between the prompt delivery month and three months later has returned to a $0.2/bbl contango for the first time since July. The spread reached a $6.2/bbl backwardation back in late September when tight supply focus peaked following Saudi and Russian production cuts. The equivalent three-month spread in Brent is also toying with contango, having collapsed from around $5.7/bbl to the current $0.3/bbl.

All developments that have seen third quarter strength deflate rapidly with production cuts from Russia and not least Saudi Arabia having a limited impact on the market. From late June to late September Brent crude oil rallied by around one-third in response to Saudi production cuts amid a quest for higher prices and OPEC estimates of a 3 million barrel a day supply deficit, but since then the demand outlook has weakened, thereby forcing a strong sell reaction from speculators who got caught with a big long and the smallest gross short position in 12 years.

According to the latest COT (Commitment Of Traders) data from the CFTC (Commodity Futures Trading Commission) and ICE Exchange Europe covering the week to November 7, hedge fund selling of crude oil extended to a third week with the combined net long in WTI and Brent slumping to a four-month low at 312k contracts, down 44% since September when the focus on tight markets led by Saudi production cuts peaked before demand worries began taking over.