WTI Crude Oil Faces Seasonal Pressures Amidst Market Speculation

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In recent weeks, the West Texas Intermediate (WTI) crude oil market has undergone significant turbulence, marked by a notable influx of noncommercial selling. This trend has steered the spot-month contract from a recent high near $95 to a low in the vicinity of $81. Adding to the complexity, commercial traders have exerted additional pressure, leading to the erasure of the spot spread’s $2 backwardation by early November.

The current market discourse revolves around whether the US domestic WTI market has taken a bearish turn, prompting discussions in media, social platforms, and mainstream financial circles. A pivotal observation is the spot-month futures contract dipping below its 200-day moving average, a phenomenon not witnessed since July 24. Speculations abound regarding algorithmic reactions to such movements, with expectations of increased selling when these thresholds are breached.

Wednesday’s trading activity added weight to these arguments as the spot-month contract experienced a further decline of $1.90 from the previous day’s close, accompanied by trade volumes exceeding 222,000 contracts. Tuesday’s drastic plunge, where the spot-month contract saw losses of up to $3.73 before settling $3.45 lower for the day, registered a trading volume of a staggering 396,300 contracts.

The substantial price decline, nearly $4.00 within a week, indicates ongoing liquidation by noncommercial traders. The latest Commitments of Traders report from the Commodity Futures Trading Commission (CFTC) revealed a net-long futures position decrease of 38,507 contracts among this group. Notably, this reduction was primarily driven by an increase in short futures contracts, painting a more bearish picture than a scenario dominated by long liquidation.

The current market sentiment suggests a discernible shift in supply and demand dynamics, prompting funds to recalibrate their long-term investment strategies. The fundamental landscape has lost some of its earlier bullish tones, with the spot futures spread experiencing a considerable drop. On September 27, the spread showcased a $2.00 backwardation, signalling strength. However, this robust position has dwindled significantly, casting a shadow on the market’s previous vigour.

Despite Saudi Arabia’s announcement of extending production cuts through December, the spot spread’s decline remains noteworthy. The complexities of the crude oil market extend beyond headline news, with traders incorporating both known and unknown factors into their strategies. This aligns with the foundational principle of technical analysis, where market action is deemed to discount everything.

Assessing WTI’s bearish potential from a technical standpoint presents a nuanced perspective. The long-term trend appears to maintain an upward trajectory, having rebounded from a low of $63.57 in May to a September high of $95.03. However, subsequent months witnessed a lower close in October ($81.02) and a potential continuation of this trend in November. This pattern aligns with a Benjamin Franklin Fish Similarity, implying a probable lower close at the end of December.

Seasonal considerations further contribute to the complexity, indicating a typical 12% drop in the spot-month WTI contract from the first weekly close of October through the third weekly close of December. The market’s first-week October close at $82.79 points to a downside target near $73.00. This seasonal selloff unfolds within what could still be perceived as a long-term uptrend.

In conclusion, labelling WTI crude oil as definitively bearish may be premature. The residual backwardation in the spot spread suggests lingering bullish fundamentals. However, investment traders currently find more compelling opportunities in markets with stronger bullish fundamentals. The eventual return of noncommercial buying to crude oil is anticipated, potentially coinciding with the establishment of a seasonal low by year-end. Observing the spreads at that time will likely provide valuable insights into the market’s trajectory.