When the Banks Tell Us Their View of a Market
Davin Blythe of FairValue Trader - InsideFutures.com - Thu May 17, 10:50AM CDT

This article was originally published on Nadex.com.

Crude oil futures have been rallying for eleven months now, coming off of the $42.05 low and rising to just below $72.00 in the last few days. Crude (CL) initially sold off last week in response to the Iran embargo news, but the market quickly rebounded.

Yesterday was the weekly crude inventories report, which was a mixed bag in terms of supply and demand. However, following that release, there were a couple of bank comments that we felt were worth paying attention to.

The first note came from Goldman Sachs, stating, "Oil fundamentals are now more bullish as robust demand faces supply disappointments.” This bullish fundamental view caused commodity analysts at the giant bank to raise their price target to $82.00 this summer for crude oil.

This note was followed by one from ANZ Bank in Australia. Being a major exporter of commodities, including crude oil which makes up a huge part of their national GDP, Australian banks usually pay close attention to the various commodity markets, including crude oil. Yesterday, ANZ released that crude is “threatening to break through $80 a barrel” and that “geopolitical risks continue to support prices.”

So, while the banks are bullish regarding crude oil based on fundamentals, we decided to check out the CFTC’s Commitment of Traders Report, which shows how large positions are accumulated in this market.

The chart shows the largest buildup in many years of large speculators to the long side. So while the banks are bullish oil, we have to consider that it is a crowded trade, and we are left wonder who is left to buy. Now, this doesn’t mean that this market will start going down. However, we think that this market could be reaching a top and/or could start drifting sideways, and when it does start selling, there are many long positions to be liquidated.

When looking at a seasonality chart of crude oil, the historical analysis suggests that rallies in the first half of the year are very common. Historically, the tendency is to rally into the end of June, the first half of the year, then trade sideways through the end of summer before selling into autumn.

 

Today’s economic calendar is busy, but it doesn’t offer anything that we consider to be market moving.

 

 

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