Trend-following commodity trading advisors (CTAs) could soon begin covering their significant short positions in oil, driving prices higher, according to Bank of America analysts cited by Investing.com.
The sudden buying demand in the crude futures market has the potential to lead to a short-term rally in oil prices if CTAs rush to short covering.
Last week, oil prices lodged another weekly gain, despite the announcement from OPEC+ that the group would continue to boost production in July with another 411,000-barrels-per-day hike.
Geopolitical events and the U.S. jobs report on Friday boosted prices, while wildfires in Canada continued to provide support.
Speculators raised their net long position in oil futures, with buying dominated by fresh buying in NYMEX WTI futures, ING’s commodities strategists Warren Patterson and Ewa Manthey said on Monday.
Early on Monday, oil prices were up by about 0.5%, with Brent above $66 and WTI rising to $64.85 per barrel.
“The US market has been more constructive recently, which is also reflected in the narrowing of West Texas Intermediate’s (WTI) discount to Brent,” ING’s strategists said today.
Renewed U.S.-China trade talks also supported oil prices.
Last week, HSBC said its forecast that Brent Crude prices would remain around $65 per barrel later this year could be too optimistic as OPEC+ continues to raise production, which will result in a bigger-than-expected surplus after the summer ends.
Currently, the market is fairly balanced, and peak summer demand will support the large OPEC+ increases already announced for June and July. But the hikes after the third quarter – when peak demand season would have ended – will raise the surplus on the market to higher than previously expected levels, HSBC said.
Banks have divergent opinions about whether OPEC+ will proceed with easing the cuts.
Goldman Sachs, for example, expects OPEC+ to make its final production hike in August at the now-standard level of 411,000 barrels daily.
By Tsvetana Paraskova for Oilprice.com
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