The commodity squeeze higher continues as nearly all sectors are seeing better pricing despite the continued oversupply and less than stellar global economic performance. The shift seems to be driven by the crude oil recovery following the failed attempt at a unilateral production freeze at the beginning of last week.
That bearish news was brushed aside almost immediately, as the market spent the majority of the week trading higher on some sketchy fundamentals. The strike in Kuwait that reduced production has already ended, and any future hope for a production agreement at the June OPEC meeting appears to be empty speculation as the key players continue to threaten production increases. Inventories remain at record levels and China's struggling economy now looks to have stabilized just enough to keep the Central Bank in neutral for the time being.
Not much in the way of strong bullish sentiment
So why the key reversal? Much can be made of the rally after the fact. We can theorize it was consumer hedgers, fearful that the lows are in for the year, are covering their risk in the event of some magnanimous agreement to stabilize prices is eventually struck.
The technicals certainly support higher prices as the break-out last week, in anticipation of the Doha meeting coming to an accord, added key support should prices dip again momentarily. The fact of the matter is that commodities in general are seeing a push higher that may have been led by crude finding some legs off the lows, but is equally significant when looking at the silver rally, soybeans and other grains and even natural gas trading back above 2.00 consistently.
This broad shift in sentiment has turned the net short position into a strong net long position, thus lending further support to the recovery.
It is important to remember the largest reason for why crude oil took the dive in pricing that it did as it made its way as low as 26 dollar per barrel at one point. This was an old fashioned price war that was a direct reaction to the US shale industry flooding the market and 'stealing' market share that had traditionally been held by OPEC and other large producers like Russia.
It appears to have worked well, as we have seen US production crater in the past several months. However, we have also seen strong consolidation of US producers both from operational and dept perspectives. The result is that those companies, believed to be so dependent on higher prices to turn a profit, have effectively dollar cost-averaged their breakeven level for crude production substantially lower.
As prices continue to improve, the 'fracking' switch can be turned back on ramping up production again very quickly, leaving a much tighter window for those interested in regaining their lost market share. The point here is that this sentiment, just as the bearish sentiment has done over the past two weeks, can evaporate and reverse very quickly.
Key Support in the WTI June Crude:
- 42.15 (Daily 200 day moving average)
- 40.85 (Trend line support)
Key Resistance in the WTI June Crude:
- 44.85
- 46.59