Short squeeze over? Crude oil fundamentals to overwhelm geopolitics …

Quote

“Fools make researches and wise men exploit them.” -H.G. Wells

Of Interest

China’s manufacturing growth weakens as new orders drop (Businessweek)
China Lowers Interest Rates for Second Time in a Month to Bolster Economy (The Telegraph)
Hit at home, China’s ghost fleet sails high seas (Reuters)

Commentary

Geopolitics were said to have played a role in crude oil’s recent price spike. An Iranian official allegedly said Iran would move to block the Strait of Hormuz for those complying with US-led sanctions. The US military sent some ships (minesweepers) to the region should Iran act. And, of course, the situation in Syria has the potential to further intensify the conflict between Iran and the West. To some degree, it seems Saudi Arabia is alleviating some geopolitical premium in crude prices, as the world’s top producer has not pared back its production despite a pullback in demand.

And that pullback in demand is very real — China, the second largest energy consumer in the world, is seeing its gasoline refiners cut runs by 2% per day to trim back inventories. This comes on the back of a dip in Chinese crude oil demand in April (first in 3 years or so), followed by only a tepid rebound in May. And since we think the global economy is still downshifting, crude oil demand is likely to remain a weight on price.

Action

Traders have become well aware of these bearish fundamentals. So aware, the speculative short position in crude oil futures recently grew to the largest since September 2011. This suggests the magnitude of the move we saw in the past few trading sessions has more to do with short positions getting squeezed than it does with geopolitics. Is the squeeze over? Maye, maybe not. Either way, crude oil could very quickly drop to test the $70 per barrel level. One way to play for such a move is by using shares of the PowerShares DB Crude Oil Double Short ETN (symbol DTO). [Note: our members were issued a specific alert earlier today to take action on this idea. You can subscribe now to become a member, receive specific alerts, and continue getting Market Vitals – this sneak peak comes to an end tomorrow.]