Too Early to Bet on Extended Oil Bull Run – TDS

Oil prices jumped by over four dollars on Friday after the US decided to tighten its sanctions regime against Russian crude exports, while the fear that the current Israel-Hamas conflict will spread, eventually drawing Iran into the conflict, and impacting the transit of oil through the Strait of Hormuz, also helped support the rally.

Price action in the aftermath of the assault follows a large-scale stop-out of CTA trend followers' long positioning, with subsequent flows reverberating onto prices.

Our estimates of CTA positioning suggested that the Golden Week liquidity vacuum saw algorithmic trend followers liquidate approximately 60% of their net long position (equivalent to 30% of their maximum historical position size)...  In turn, while traders have attempted to stick to the 'show me the lost barrels' mantra that has prevailed over recent years, which argues for a fading supply risk premium, CTA buying activity is working against the typical playbook.

Our current positioning analytics suggest that substantial buying activity could take place north of $90.50/bbl in Brent, supporting continued strength.

 the risk premium driven by the current Israel-Hamas conflict, prompts us to say that WTI crude will trade above the $90/bbl mark in the final quarter of the year, with Brent coming close to the triple digit mark. But at this point, we don’t see a surge materially above $100/b, as we expect OPEC+ to continue supplying crude at planned levels and we judge that the presence of the US aircraft carrier strike group and military aircraft close to Israel is likely to keep crude flowing without meaningful interruptions.

... any spread of violence to the (Strait of Hormuz) region that would materially interrupt these flows has the potential to send prices surging to new highs. In such a scenario, $150+/b crude would very much in the cards. The strait is also crucial LNG pinch point, which suggests that conflict in the area would move natural gas prices to the upside around the world, and particularly in Europe.