Oil has been the big headline for more than a year now and there’s certainly no lack of interest in the commodity. From February to mid-March, it appeared as though oil was on the rebound, closing above $41 at one point. During these seven weeks, bearish bets on crude oil decreased 67% and crude soared more than 50%.
Liquidation of short positions was the biggest on record during the past seven weeks, according to the CFTC (Commodity Futures Trading Commission). Some hedge funds noted that the recent oil rally seems to have started with short sellers fearing rising prices, which prompted a short-squeeze-led rally in oil. That means there isn’t a lot of new money entering the market from long-positioned traders – a bad sign for interested bullish investors.
More Volatility Expected in April
The seven-week rally led by short sellers covering their positions seems to have come to an end. Oil dipped back below $37 amid growing concerns of increased taxation in Russia and Saudi Arabia’s refusal to cut production despite lethargic global demand.
Next month, 15 or 16 oil-exporting countries are expected to attend a meeting to consider freezing output, but Saudi Arabia’s recent comments that it won’t do anything unless Iran and other producers cut back makes it highly unlikely that anything solid will come of the meeting. More inaction in the oil industry means that oil will bounce back down to the mid-$30 range and could even dip lower. Iran has already stated that it won’t cut production until its crude exports reach pre-sanction levels. Making matters worse, the Saudi deputy crown prince reported that Saudi Arabia is looking to offload 5% of the Saudi Arabian Oil Company in order to free up enough cash to keep up its high-production policy and keep oil prices depressed.
Meanwhile, U.S. crude oil production hit its lowest figure since November of 2014. Both OPEC and the EIA expect oil production to fall by as much as 700,000 barrels per day this year. But falling production in the U.S. could have a stimulative effect on oil prices, thereby creating a floor.
The Fed’s flip-flopping on interest rates and inflation expectations means that the U.S. dollar is gaining strength again and hurting oil prices. Unless a clearer indication of a rate hike comes in, we should expect to see more volatility in the markets. A rate hike this year would spell trouble for oil with a higher U.S. dollar, while a delay could cause the dollar to stumble and allow oil to rise again.
The Bottom Line
April looks to be another volatile month for oil and the broader markets as a whole. As it stands, OPEC is the only organization that will be able to heavily impact oil prices. But despite the upcoming meeting in April, a significant change doesn’t appear to be on the horizon. Unless the global economy sparks higher demand, it could be a while before oil climbs back above $40 per barrel.