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The ‘Smart Money’ Has Been Building A Large Short Position In Crude Oil
Though crude oil prices have recovered since the start of this year and fears of an even greater energy bust have subsided, crude oil market insiders or the “smart money” have been aggressively hedging against another bearish move. These so-called insiders are commercial hedgers (physical oil producers and users) in the futures market and are worth paying attention to because they are frequently correct at major market turning points.
The “smart money” has collectively built a short position of approximately 400,000 futures contracts, which is the largest commercial crude oil short position since the spring of 2014 – right before the epic 70% oil price crash. Watching the actions of the “smart money” is very helpful for determining if a market bounce is legitimate or just a “dead cat bounce.”
When following the “smart money,” it is still necessary to have technical confirmation from the price action because the “smart money” can remain on one side of the market for a very long time. For now, the key level to watch in WTI crude oil is the $30-40/barrel support zone that marked the bottoms of the historic crude oil bear markets in 2009 and 2015. A convincing break below this zone would be bearish, but if oil is able to remain above this key zone, it would be a neutral to bullish sign.
Like WTI crude oil, Brent crude oil has its own $30-40/barrel support zone that is worth watching:
The U.S. dollar strongly influences the direction of the crude oil market in an inverse manner. As I’ve been discussing for a while, the U.S. Dollar Index has been trading in a relatively narrow range for nearly two years. When the dollar finally breaks out of this range in one direction or the other, a notable move is likely to occur. The direction of the dollar’s next move should provide insight into which direction crude oil will be heading at that time too – bullish dollar moves are bearish for crude oil and vice versa.
For now, traders should keep their eyes on the “smart money’s” crude oil short position, how WTI and Brent crude oil act at their key $30 – $40 support zones, and if the U.S. Dollar Index starts to break out of its two year old trading range. The eventual return of U.S. dollar volatility should also create more volatility in the crude oil market.
(Disclaimer: All information is provided for educational purposes only and should not be relied on for making any investment decisions. These chart analysis blog posts are simply market “play by plays” and color commentaries, not hard predictions, as the author is an agnostic on short-term market movements.)