Commodity Trade Mantra

Stronger Dollar And OPEC Inaction Force Crude Oil Below $40

Stronger Dollar And OPEC Inaction Force Crude Oil Below $40

Stronger Dollar And OPEC Inaction Force Crude Oil Below $40

Into the second week of the month we go, and we see the usual dearth of economic data that follows Nonfarm Friday. The only release of note overnight was a disappointing German industrial production print, while we do get some energy-related data via the EIA’s drilling productivity report to tide us over.

The spirit of Louis Prima, who would have been 105 years old today, lives on in the crude oil market, as there was a whole lot of jumping, jiving and wailing in response to the OPEC meeting conclusion on Friday. The descent into disarray by the cartel has prompted WTI crude oil to plummet into thirty-dollardom; a strengthening dollar is only serving to strong-arm the crude oil complex lower.

This week we get our timely triumvirate of monthly crude oil reports: EIA kicks things off as usual with tomorrow’s Short Term Energy Outlook, while Thursday sees the release of OPEC’s monthly crude oil report. IEA brings up the rear with its crude oil market report on Friday.

The chart below (via @jkempenergy) illustrates that short positions held by hedge funds have reached 172 million barrels, almost doubling in the last seven weeks to reach their third-largest position on record:

(Click to enlarge)

While this highlights the extremely bearish mindset of the market, we have to remember what happened the last two times we were stretched to such extreme short positions: at the previous lows in March and August. At these junctures, prices experienced a swift bout of short-covering, propelling prices higher.

Looking at global offshore rigs, even though 40 out of 350 rigs have been taken out of the market in the price rout of the last year, according to analysis from Rystad Energy we need to see up to 100 rigs go offline to halt the supply glut.

Zooming in from a global viewpoint to a domestic one, the EIA releases their drilling productivity report today. It is set to underscore the trend that has been in place for much of the year – shale play production drifting lower, led by Eagle Ford and Bakken.

All the while, total US production in September only dropped a mere 0.2% according to EIA, as production growth in the Gulf of Mexico helped to offset the loss from onshore plays. Oil production from the Gulf of Mexico is set to rise by 10% in 2015, as projects come online this year. Accordingly, production in September was up to almost 1.7 million barrels a day.

Finally, today’s quote of the day is the first line of this article, which starts ‘It used to be said of OPEC that it was like a teabag – it only worked in hot water‘. That made me chuckle.



Courtesy: Matt Smith

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  • Not even able to trade above yesterday’s close, Yikes! Open Interest has dropped 70K contracts in this mornings selloff. Hmmm could we see a bottom?

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