Société Générale analysts have issued a warning regarding the U.S. benchmark for crude futures, West Texas Intermediate (WTI), suggesting that it may be vulnerable to a near-term downturn, despite achieving its highest close since November 7 on Monday. The rapid rally, driven by speculators, led to WTI closing at $91.48 per barrel on the New York Mercantile Exchange, marking a significant 37% increase from its 2023 low of $66.74 on March 17.
This cautionary note comes amidst an energy sector that experienced a bullish inflow of $4 billion in the week ending Saturday, driven by $2.7 billion in inflows for WTI and $2.1 billion for Brent crude, according to Société Générale’s team, led by Benjamin Hoff, the global head of commodity research.
The analysts observed that money-manager positions in WTI have now reached their highest level since February 2022. Brent positions have also seen an uptick, reaching their highest level since March of this year. Bullish flows are characterized by increased long positions and short coverings, or when long positions outnumber short positions, or when long liquidations are fewer than short coverings.
However, Société Générale’s one-year overbought/oversold (OBOS) model indicates that WTI is currently “extremely overbought,” suggesting a high susceptibility to a one-year pullback. Brent crude has followed a similar trend but has not entered the overbought zone, mainly due to lower long money-market positioning relative to total market open interest.
In related developments, Saudi Arabia’s decision to reduce oil production by 1 million barrels per day starting in July has contributed to the crude rally, raising expectations of a supply deficit in the second half of the year. This production cut has been extended until year-end, with Russia also following suit by reducing supplies by 300,000 barrels per day over the same period.