Crude oil price has traded mostly in a range of $51- 61 for the past two months and for the fourth consecutive day, the price has been trading in an upward direction. The recent momentum in the oil price is due to the two main reasons: firstly, the drop in the U.S. crude oil inventory data which has made investors believe that the supply is well managed and the chances of oil glut forming again are minuscule. Finally, there is an optimism on the resumption of the face to face trade negotiations between the U.S. and China. Remember demand always plays an important role, if it is strong, it can take care of extra supply itself, but if there is a weakness, even a small supply can start to look like a glut.
So, the question is what is the impact of heightened geopolitical tension?
Well the answer is in the forward contracts. We need to focus on the gap between Brent crude’s front-month and the following month (second month) contracts. Currently, this gap is 8c/bbl. In simple terms, the backwardation of the curve is the smallest since March. The below chart shows the spread between the current month and forward month for Brent crude, and it is no way closer to the levels which we experienced in late December last year when Trump actually started to disrupt things in the Middle East.
In addition to this, we also have the International Monetary Fund who hasn’t painted an optimistic picture- it has notched down the global growth forecast from its previous estimates.
As for the speculators positions, the CFTC and ICE data shows that there was an increase in the bearish percentage, the bullish sentiment dropped by -0.4% and overall net short positions increased by 7784. The chart below shows total net long and net short positions.
To conclude, it seems like traders are less worried about the geopolitical tensions and more focused on the supply data and the on going trade negotiations between China and the U.S.
