Short Squeeze Is Over And Fundamentals Need To Take The Lead
Since the market sniffed out the extreme positioning in oil futures, WTI and Brent have staged a V-shaped recovery that surprised even market veterans. As we wrote on June 7 in a piece titled, "It's So F***Ing Beautiful." We said:
I am a contrarian by nature. So when I saw the headline from Bloomberg in early April proclaiming $100/bbl oil by this summer, I get nervous. Similarly, I get extremely excited when I see speculator oil positioning hitting near all-time lows. Nothing is more f***ing beautiful than that, I love it when the market is so one-sided, it fails to see the obvious. And right now, it is obvious to me that people are simply too bearish.
History doesn't repeat, but it often rhymes, and this is no different than the saga we saw in early 2024 when everyone decided Q1 balances were going to the gutter. Similarly, people got too bullish towards the end of Q1 on the heels of no inventory builds only to witness inventory builds the next 2-months.
The consensus is almost always wrong in the oil market, and it's your job to decipher why it believes what it believes and position accordingly.
In this case, the obvious is obvious. Positioning is too heavily skewed to the bear side, so as the fundamentals playout, it's time to get more bullish. Please wait for trade alerts next week for long positions in the oil and natural gas trading portfolio.
Fast forwarding to today, the money manager positioning in oil futures will likely show a further recovery.
Source: CFTC, Giovanni Staunovo
We think judging by the magnitude of the move in flat prices coupled with the move we are seeing in timespreads, most of the short covering is done.
Brent 1-2
WTI 1-2
In order for oil prices to rally further going forward, oil market fundamentals need to take the lead.