The oil market has been fairly settled over the last month or so with the price trading between $70 and $65.50 but will the chop continue or will we see a break lower?
OPEC+ has now doubled down on production increases: +548k barrels/day in August and another +547k in September. In other words, they’ve effectively undone their 2023 production cuts. Under normal circumstances, this would keep oil under pressure.
On that news, I would remain bearish in my sentiment on oil.
Commitment of Traders (COT) Is Flashing a Warning
Non-commercial traders (hedge funds and large speculators) are now heavily net short oil, and are reaching levels similar to what we saw back in early July, right before prices reversed higher.
When positioning gets this extreme, the market is vulnerable to a sharp reversal. If we combine this with the fact that the US labor market data is weakening, pushing the Fed closer to rate cuts (USD negative, commodities positive), and Trump is threatening secondary sanctions on Russia (potential oil supply squeeze), it wouldn’t take much to spark a sharp short-term bounce in oil.
My Take
Right now, the short-term move in oil still leans bearish because of supply. But positioning suggests to me we could see this downside become short lived. If the price breaks the current lows around $65.50 and then reaches the key support of $57.50, I’ll be watching closely for a reversal signal. If the shorts start unwinding, oil could easily pop higher, catching a lot of traders off guard.
Trading Plan:
Keep an eye on COT positioning and price action around key support levels.
Be ready for a headline-driven spike, especially if Russian sanctions or Middle East tensions escalate.
FX angles: CAD and NOK could be interesting plays if we see a squeeze in oil.
For now, I’m cautious but I’m not ignoring the risk of a reversal.