Small Crude Oil Specs Pay Price for Getting Caught in Bull Trap

The “little guy” or the small speculator may have paid the price this week for trusting the headlines in the crude oil. Recently, reports of crude oil moving to $80 to $100 before the end of the year have been dominating a few of the financial websites. They became particularly prevalent following President Trump’s announcement of renewed sanctions against Iran on May 8. At that time, I said “not so fast” while warning that the market was ripe for a “buy the rumor, sell the fact situation”.

The problem I had with the rally and jumping on-board to catch a few dollars at current price levels was with the timing of the move. Bullish speculators responded to the news as if Trump was holding an Iranian oil valve in his hands, getting ready to turn it and shut-off supply immediately. Instead, the U.S. proposed a way to gradually enforce the sanctions.

The U.S. was being painted as something evil when it withdrew from the Iranian nuclear accord. However, it did propose enforcing the sanctions so that companies doing business with Iran had a chance to shore up any deals. Furthermore, it discussed the gradual shutdown of Iranian exports. It was speculators not the U.S. that blew the lid off the market that eventually killed the rally.

“Too Far, Too Fast”

Essentially, prices accelerated “too far, too fast”, or to put it another way, prices were too far ahead of the fundamentals. Small speculators, looking for the elusive $100 a barrel crude oil, apparently forgot about OPEC’s price targets and the fact that the market will not be able to hit triple-digits without hedge fund support.

Focusing on what professional traders do rather than what they say is one of the most important lessons for any small trader. Despite the plethora of bullish commentary about crude oil prices over the past three weeks, hedge fund managers were actually taking profits and trimming their net long positions rather than adding to them. This was very clearly presented in each week’s Commitment of Traders Report. And who do you think was buying from the hedge fund sellers? You guessed it, the non-professional small speculator. On May 10, I even warned about getting caught in a bull trap.

Russia, Saudi Arabia and Others Ready to Boost Supply

Crude oil prices plunged on Friday on reports that a group of two dozen producing nations were poised to begin easing production limits imposed by an OPEC-led agreement designed reduce the global supply glut and stabilize prices.

According to Reuters, Russian Energy Minister Alexander Novak met with his Saudi counterpart, Khalid al-Falih, in St. Petersburg to discuss the deal, which has aimed to keep 1.8 million barrels a day off the market since January 2017. The parties are now considering a gradual exit to a deal to compensate for falling production in crisis-stricken Venezuela and anticipated export disruption from Iran, which faces renewed U.S. sanctions.

“The moment is coming when we should consider assessing ways to exit the deal very seriously and gradually ease quotas on output cuts,” Novak said in televised comments, according to Reuters.

The ministers are considering a supply increase of as much as 1 million barrels a day to cool the market, sources told Reuters. Al-Falih is particularly concerned about the impact of oil prices above $80 a barrel on consumer nations like China and India, the new agency reported.

Reuters went on to say that the move to potentially ease the production caps follows news reports that Saudi Arabia was roughly targeting $80 a barrel to support domestic initiatives. Those reports helped bolster crude prices with the last two months.

Looming Monthly Closing Price Reversal Top

July WTI crude oil is now in a position to post a monthly closing price reversal top, this after posting daily and weekly reversal tops. This is a very rare triple closing price reversal top occurrence. This means the selling is serious.

Sellers have also wiped out the entire Iranian sanction premium which means there is more behind the selling pressure. This likely represents major concerns over increased supply.