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As the oil price falls how best to trade crude

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What is happening to the price of oil? Despite increasing geopolitical risk in countries like Iraq, crude’s lost around USD 13 per barrel since its peak in June. Saxo’s Ole Hansen says momentum in both Brent and WTI remains negative with the spread between the two narrowing to almost USD 5. He says WTI is his preferred shorting candidate at the moment.

Five to six weeks ago there was a record long in the speculative market. But now Brent has broken below the 103-104 range. Hansen says the price is approaching the ‘psychological level’ of USD 100 per barrel. He believes further weakness is likely to trigger a response from Organization of the Petroleum Exporting Countries (OPEC) in terms of reducing production.

The reason for the price drop is that supply is out-stripping demand. Hansen notes that this is partly due to a glut building in the Atlantic basin as exports to the US slow. Refinery demand in Europe is also reducing. He says that the price in the Brent spot market is trading below forward prices which is unusual, particularly for this time of year.

Across the Atlantic, US oil production is rising along with refinery demand. Hansen says improved pipeline infrastructure has meant that it’s been easier to get hold of relatively cheap WTI crude. But as the driving season approaches he believes production will start to slow. He also expects inventories to rise as we move into the autumn.