Crude oil prices have been on a tear in recent months, rallying to levels not seen in over two years.
US benchmark West Texas Intermediate (WTI) futures have rallied by nearly 40% since late June, benefiting from a strengthening global economy, supply disruptions and speculation that OPEC and non-OPEC members will agree to extend production cuts by another nine months until the end of 2018.
Mirroring the surge in prices, speculative long positioning in WTI futures and options contracts is now the largest it’s ever been.
As this chart from Westpac Bank shows, money managers now hold an equivalent long position of 950 million barrels of crude.
That’s a lot, presenting risks ahead of next week’s OPEC meeting where the cartel is expected to announce a further extension of production cuts.
Firstly, given crude prices have been rallying in anticipation of this announcement, increasing the risk that we could see a “buy the rumour, sell the fact” scenario given it’s largely been priced in already.
With speculative positioning the highest it’s ever been, stretched positioning does present a risk.
Secondly, should OPEC stun the markets and not extend production cuts, the unwinding of speculative long positioning that will likely follow could lead to a massive selloff in crude prices.
While that’s an unlikely scenario, it will undoubtedly add pressure on OPEC to at least meet the market’s current lofty expectations.
Front-month WTI futures currently trade at $58.42 a barrel, the highest level since July 2015.