Russia is the Wildcard that Could Launch Crude’s Next Rally

Last week, crude oil prices closed lower with April U.S. West Texas Intermediate prices falling $0.66 or -1.22% to $53.33 and May Brent futures weakening by $0.41 or -0.73% to $55.90. The common theme in the crude oil market news has been “the market is rangebound because increasing U.S. production has been offsetting OPEC production cuts”.

At the same time, the news is reporting that hedge funds and other money managers have purchased a record number of futures and options contracts in WTI and Brent futures, showing their confidence in OPEC’s ability to drive prices higher.

According to exchange and government data, hedge funds now hold a record net long positions equivalent to 951 billion barrels across the three main Brent and WTI contracts. Stated another way, hedge fund long positions outnumber short positions by a record ratio of 10.3:1.

Given this information, one would think that crude oil prices would be soaring, but we all know that this hasn’t been the case.

To even want to be long crude oil, a trader has to be focused on the bullish side of the supply and demand equation.

Last week, we found out from Reuters that OPEC boosted already strong compliance with the cartel’s six-month agreement to 94 percent in February. On paper, this sounds bullish, but once again, a rally couldn’t gain traction on the news, and prices fell. If this is the news guiding the hedge funds then it didn’t seem to be a factor last week.

One item that is pretty obvious on the charts is that the big buying has been coming in on the dips and that buyers have been hesitant to buy strength. This may be an indication that the hedge funds have been willing to buy low and sell high, but reluctant to take a chance at buying high and selling higher.

If this market is going to breakout to the upside then hedge funds are going to have to switch to momentum mode just like the stock market investors are doing at this time.

The hedge funds may be waiting for a catalyst. And I believe this catalyst will be news of increased production cuts from Russia.

One of the most interesting things about the 94 percent compliance figure is that the United Arab Emirates, Iraq and Russia have not been fulfilling their pledges to cut output. On the other hand, Saudi Arabia has cut more than it pledged.

Over the near-term, all things being equal, I think that the downside in crude oil will be limited as long as the OPEC deal remains in place. However, I also believe that this market could rally sharply higher if any of the three laggards – the UAE, Iraq and Russia – announce new lower production levels.

Russia is the key. It has only cut production by 100,000 barrels per day, or about a third of its pledged amount. The crude oil market is likely to remain rangebound over the near-term, but if Russia raises the level of its production cuts then we could finally see a breakout move to the upside. Basically, Russia is the wildcard and the key to the next major rally in crude oil.