Unlike some other markets, such as gold, clients are more than happy to change their short-term trading view on WTI, moving from net long to net short and back again several times since the end of April.
After steep declines, sentiment shifts to net long, and then these long positions are gradually cut back. As I have argued elsewhere, the trend in sentiment, and not just its absolute level, is the thing to watch.
So, for example, clients had been net sellers of oil from the beginning of July, when the price neared $74 for the first time since November 2014. As this new higher high in the post-2016 uptrend was followed by declines, long positions increased and short positions dropped away. Client sentiment went from circa 30% short to only 40%, and then switched to neutral by mid-month.
Buying continued throughout August, and it is true that the price continued to decline, so some of these early movers will have been stopped out. But the increase in sentiment timed the bottom in mid-August very well, and then we saw the price and sentiment switch once again.
This market is a good example of how we should view IG client sentiment. Not simply as ‘always wrong’, but in many cases a useful tool for indicating when it is more favourable to go long, and then when conditions seem more propitious for shorts.
With sentiment now at its most net long in months, and the gap between the net position and the price so wide, we should be on watch for signs of a reversal in both crude and client sentiment, as the ongoing rally in crude prices stages another move higher.