Short positions on crude oil up 140% last week; wait for prices to settle before taking fresh positions
By Bhavik Patel
After Saudi Arabia’s warning for short sellers, looks like they are coming in squeeze. Short sellers have piled on short positions as this week shorts were up to 148 million contracts, up 140% from last month on back of recession fears. On Thursday and Friday, crude recovered from 5590 to 5950 as shorters got a little nervous heading into the OPEC+ weekend, with new rumors circulating about the group’s discussions about another 1 million bpd in production cuts.
OPEC+ is scheduled to meet on June 4 and although, Russian Deputy Minister has said no production cuts is on the table, Saudi Arabia’s tone suggests that there might be some discussion of production cuts, as they want prices to trade above $78 to cover their fiscal deficit. The key reason why OPEC+ will continue to surprise with additional oil output cuts is simply that Saudi Arabia and many other OPEC countries need oil prices higher to survive and prosper. On Thursday, Reuters suggested that the OPEC+ group would be unlikely to deepen its production targets at the meeting this weekend. But late on Friday, Reuters suggested that OPEC+ was indeed discussing an additional output cut of around 1 million barrels “among possible options” for the meeting on June 4.
The successful debt ceiling negotiations brought some relief, but the demand outlook for crude oil remains uncertain. This week US inventory increased on back of increased imports and decline in strategic reserves. Market is waiting how US summer demand plays out and also waiting for China’s cyclical recovery.
Crude technical levels
In MCX, crude oil has made double bottom around 5545. Price was also near oversold region which gave excellent opportunity to go long in Crude as historically crude has bounced off and gained minimum 6 to 8% whenever it has come near oversold region. Now that OPEC+ meeting is on 4th June so we might see gap up or gap down opening in crude. We would advise some noise to play out and let crude settle on Monday before taking fresh positions on Tuesday. If price once again approaches the oversold region of 5600-5550, one can go long with stoploss of 5400 and target of 6000, however if prices open higher, then one should wait for any correction till 2-3% before taking any position.
(Bhavik Patel is a commodity and currency analyst at Tradebull Securities. Views expressed are the author’s own. Please consult your financial advisor before investing.)