Crude oil on a slippery slope, but traders continue to be bullish

By Pritam Kumar Patnaik

No one likes bad news; market and its bulls are no different. If it were just a small insignificant cautions to the wind, it would still be brave to ignore, but to ignore glaring evidence that the global markets are heading towards an economic slowdown, if not already in one, could be dangerous.

The chorus of caution from leading central banks should not be ignored. There have been rampant downward growth revisions across geographies and economies, the latest being the announcement by the ECB president Mario Draghi, who on Thursday revised the GDP growth numbers downwards for 2019, from 1.7 per cent forecast in December 2018 to current forecast of 1.1 per cent.


The inflation number for 2019 too was revised downwards to 1.2 per cent from the December forecast of 1.6 per cent. While the US economy remains a rare exception to the norm, with continued flow of positive data, but there too we are witnessing signs of stagnating growth numbers.

The monthly jobs report on Friday showed US hiring was the weakest in more than a year and China said exports had tiled off in February. While it’s premature to adopt a sense of all prevailing gloom, but one has to tread with caution.

That implies, one has to trade with caution for the coming few months, as we can expect heightened volatility across all asset classes, especially commodities.

Traders seem to be hanging on to any positive developments, irrespective of how small or insignificant it is, resulting in unsustainable short-term exuberance, but we have often witnessed the commodity re-calibrates itself based on facts and factors of supply and demand.

In the coming few weeks, we will see commodities such as crude oil being impacted by volatility. Prices corrected in the last few trading sessions on the back of weak US job data and China’s disappointing export data, despite which it ended the week with a paltry 0.5 per cent gains.

The traders continued with their bullish wagers, as they believe that a constrained supply will be enough to outdo the demand drop due to economic slowdown globally. The Opec cuts, slight drop in the US oil production and Venezuelan political turmoil has only aided to the supply squeeze, thereby providing support to the prices.

The traders have increased their long only trades by 5 per cent last week, the most since July last year and cut their shorts by as much as 13 per cent.

This clearly shows that the money managers are currently bullish on oil. That said, one needs to factor that supply constraint such as Opec cuts are by design and have limited ability to control the supply glut. Add to that, if the Venezuelan oil embargo to the US is diverted to new markets like China and India, the impact of artificial or temporary supply disruptions will be short lived.

The market seems to be ignoring the impact of a growing economic slowdown, which will not only impact crude, but also a host of other commodities. While and clear trend will be dependent of future economic data, in the absence of the same, the market will continue to be volatile. For day traders, one should look at going short on rallies, but with strict stop losses.

(Pritam Kumar Patnaik is Head of Commodities at Reliance Commodities)