Highlights:

• Crude Oil Technical Strategy: awaiting break above $50.20 to build long exposure
• Physical market structure favoring stronger demand than seen in WTI
• End of week surge showing Crude could join base metals to break higher and continue summer trend
• IGCS Sentiment highlight: Sharp rise in short positions provides contrarian signal to look for upside

What a wild end to the week. Crude Oil went from trading lower in an orderly fashion to nearly closing the day up 3% and almost ending the week positive. For now, the focus remains at $45.38/bbl as support (lower horizontal white line), and $50.20/bbl as resistance (lower high on the chart above). The price has oscillated between these levels, it is difficult to be confident (and credible), and price breaks support or resistance. The strong move higher helped Crude Oil trade higher by the most in the month of August, and puts focus on resistance being tested before support.

While the technical picture appears set to test resistance, the fundamental picture has favored that outlook for the past few weeks thanks to the physical market structure. The premiums seen in physical crude have been trading at increasing premiums to the benchmark markets, which typically occurs as supply shrinks relative to demand. Aligning with the kick-off higher on Friday afternoon was news that the White House Chief Strategist, Steve Bannon was being dismissed from his role, which helped kick up risk sentiment at the same time that the Baker Hughes Rig Count showed the largest drop in Active US Rigs since January.

Outside of WTI, we also see bullish pressure in Brent, the international oil benchmark that traded in backwardation for the eighth straight day and as Brent is trading at a 2-year premium to WTI. When comparing the developments in the physical markets with the potential sharp short unwind on US political news, we will watch for Crude Oil to test resistance near $50.20. Such a move would put Crude in alignment with base metals that have recently been trading at 3-year highs for the likes of Copper and Aluminum.

Give the strong rise in Crude Oil since Q3 began ,click here to see the opportunities we’re watching in Oil.

While price remains below resistance, I’ll stay cautiously optimistic, but we continue to see a weak dollar, positive signs in the physical market, and other commodity blocs doing well that are correlated to Oil demand. All of this is happening at a time when

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Oil traders aggressively closed out short positions before week’s end, sending prices 3% higher

Chart Created by Tyler Yell, CMT

Crude Oil Sentiment: Net-long crude positions bias provides contrarian signal to look lower

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

Oil – US Crude: Retail trader data shows 58.7% of traders are net-long with the ratio of traders long to short at 1.42 to 1. The number of traders net-long is 26.6% lower than yesterday and 7.0% higher from last week, while the number of traders net-short is 4.5% lower than yesterday and 22.6% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Oil – US Crude prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Oil – US Crude trading bias (emphasis mine).

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Written by Tyler Yell, CMT, Currency Analyst Trading Instructor for DailyFX.com

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