When in doubt, it's always a good idea to blame the oil speculators, says Phil Flynn of the PRICE Futures Group.

The Wall Street Journal is going to upset a lot of people with a story on oil speculators that had a sub-headline that read, Speculative wagers on a continued rally in crude are steering outsize price swings as consumers face higher fuel costs at the pump.

The main headline of this WSJ article was disturbing as well, reading Wave of Bullish Oil Bets Drives Big Price Moves. The Journal pointed out that the ratio of bullish bets on US crude to bearish wagers surged to 23.1 during the week of June 15. That was the highest level since the summer of 2018 and was nearly tripled the figure from five weeks earlier. While the ratio has edged lower in recent weeks, it has stayed at levels considered by many analysts well above to six to one where it started. Upbeat sentiment has made oil one of the hottest trades on Wall Street, briefly pushing crude prices above $75 a barrel to the highest closing point since 2018 prices and have roughly doubled since the end of October according to The Wall Street Journal.

All of this is true, yet the Journal failed to mention the reason why speculators had piled into the oil market. It is perhaps because the fundamentals for oil are about the most bullish they've been in years. All you have to do is look at the historic drop in oil inventories that we've seen over the past seven weeks, and you can understand while speculators are driven to this market. This is a reminder that speculators don't necessarily drive the price of a commodity but are driven to that commodity because of very bullish fundamentals.

The re-opening of the global economy, the underinvestment in crude production and the war against fossil fuels is the real reason why oil prices are going up. Demand is rising and supplies are not keeping pace. John Kemp at Reuters points out that US shale firms adding drilling rigs much more slowly in this cycle than during the two previous cycles. The oil-directed rig count has risen by an average of +3 per week over the last 13 weeks compared with an average of +11 per week at this point in the recovery that started in 2016 and +5 per week in the recovery that started in 2009. The lack of a drilling response to higher prices is the most important reason prices have climbed above the long-term average so early in the current cycle.

In other words, the reason why prices were going up is because of the lack of drilling not because of speculators. Speculators are doing their job by reflecting the fundamentals because we're seeing ever-tightening supplies. If the speculators weren't driving up prices, there would be something wrong with this market. The speculators have been right by signaling to the market that supplies are tightening and that should allow the hedgers to hedge their risk.

Crude oil prices took a swoon after basically opening flat amid concerns about the possibility of another coronavirus scare. There is also some optimism coming out of some delegates surrounding the Iranian nuclear talks and probably because Monday was been a bad day for oil in general. 

There are reports that the G20 is warning that different Covid-19 variants could threaten global economic growth. Those concerns were one of the reasons we saw some profit-taking as people believe this could hurt oil demand.

Oil traders thought the Iranian nuclear talks were dead. Yet Iran foreign ministry’s report on the JCPOA says if there is an agreement in Vienna, the US will lift sectoral sanctions, as well as the sanctions on the office of the leader & affiliates, FTO of IRGC, metal industries. Some are feeling optimistic that perhaps we can still find a way to an Iran nuclear deal even though it is still very unlikely.

Well, there is a little bit of concern about oil becoming a one-way trade with a heavy long interest. The truth is the fundamentals justify that and at this point, we're not worried about a major sell-off. We still believe that we should look at dips as buying opportunities for people who should have their risks hedged because we still think that there are significant upside risks in this market going into the end of the year. There are shale producers starting to lose money because they were too quick to lock hedges in and are now selling oil at a loss.

Now some traders are concerned that the impasse between Saudi Arabia and the UAE was going to lead to some type of OPEC production war, but my bet is that is probably still very unlikely. Reuters reported that Saudi Arabia and Oman are calling for continued oil cooperation between OPEC and its allies to stabilize and balance the oil market. In a joint statement the two countries said that they would continue to work together and that they will decide later on a date for a new OPEC+ meeting without signaling whether or not a compromise has been reached.

Andrew Weissman of EBW Analytics said that natural gas trading was especially volatile, with huge intra-day swings. The August contract jumped sharply early in the week but sold off fiercely when a triple top formed at $3.882. Later, prices rebounded after the EIA reported an extremely bullish 16 Bcf injection. Signals this week are mixed. The forecast CDDs have declined. This week’s reported injection is also not likely to be as bullish. Total CDDs nationally, however, are still higher week-over-week, providing support for cash prices and potentially limiting any pullback.

Learn more about Phil Flynn by visiting Price Futures Group.