Refueled Iraqi tensions along with remaining Ukraine uncertainty have pushed crude oil futures around 6% higher over the last week nearly touching $107 per barrel and approaching key resistance around $109.50. This spike also comes just as US production nearly matches its record high set just three weeks ago. It’s pretty clear on this chart that American crude oil producers are taking advantage of the current price level by hedging their forward production at these elevated levels.
The crude oil commercial traders’ net position has been tethered around 500,000 barrels for the last three years. The position size grows as the futures market bottoms out and begins to rally while commercial selling takes over to trim the net position as the futures’ rallies stall. Commercial traders have been net sellers of approximately 75,000,000 barrels over the last five weeks. Their current position represents their most bearish bet in six years.
We believe that record US production combined with extremely anxious producer hedging will reinforce the $109.50 resistance level. Furthermore, the geo-political issues that have fueled this rally are likely to have little impact on the actual physical trade. We will sell crude upon a reversal from these highs in our short-term overbought/oversold indicator and place a protective buy stop just above whatever price completes this swing high.
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