Sentiments turn bearish on oil

July 26, 2016

Oil prices on both sides of the Atlantic have fallen to 3-month low as bullish traders found little reasons to keep betting on higher prices. Brent has declined by more than 15% after posting a 2016 high last month at $52.86 and WTI lost 16%. When prices started to fall from their peaks it was first considered as correction, but investors are getting worried its becoming a trend.

In fact, short term fundamentals should get us worried as ongoing oversupply likely to keep dragging prices lower.

Gasoline stocks on the rise  

Although U.S. crude oil inventories dropped for 10 straight weeks according to EIA, gasoline stocks have been on the rise. Unfortunately, the U.S. summer driving season, long considered to be a major driver of the oil market wasn’t robust enough to boost gasoline consumption and as we get closer to refiners’ maintenance season, oil demand will fall further.

Drillers adding rig counts

U.S. rig count was up for the fourth consecutive increasing by 15 to 462 for the week of July 22, and taking the number of rigs by 58 since mid-May.  This signals that the U.S. production declines are getting closer to an end, which is another negative factor for oil prices.

Hedge funds betting on lower prices

Hedge funds and money managers have been turning bearish on oil most recently by taking profit from recent bullish positions and now they seem betting on lower prices by establishing new shorts. This clearly reflects how sentiments have changed from three months when bullish bets were at record high.

Technicals support the bearish outlook

Both benchmarks fell below their 100-days moving averages on Monday for the first time since March, this would likely add to the pressure as many traders view it as selling signal. However, I still consider a dip below $40 is a good opportunity to jump in if you’re a long term investor, with target above $50 until year end. 

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