For a while now we have been highlighting the growing instability in the Middle East and the growing complexity of the region. The associated risks are being driven by local disputes surrounded by geopolitical tensions between the U.S. and Russia—and the sectarian conflict between the Shias and the Sunnis.

The Syrian civil war continues with Aleppo remaining under attack by the Syrian military with the support of the Russian air force. The Syrian civil war is progressing in a manner that leaves the U.S. without any good options.

Meanwhile, the conflict continues with ISIS in Iraq with the Iraqi military preparing to attempt to retake Mosul. The tensions also continue to increase between U.S. and Iran, which is highlighted by Iran attempting to provoke the U.S. Navy in the Arab Gulf. The conflict between Yemen and Saudi Arabia continues –and now has drawn in the U.S, which reacted to the Houthi rebels firing missiles at U.S. Navy ships by launching Tomahawk cruise missiles and taking out three radar sites. Subsequently, however, it appears that the Houthi rebels fired another round of missiles at U.S. Navy ships.

As such, for another week, we are maintaining our view that geopolitics will be a positive factor with respect to the price of Brent crude.

In recent weeks oil traders have become more bullish, in part, from the announcement of a potential deal between the oil producers. We expected that trend to continue last week, and according to the latest data from the Commodity Futures Trading Commission (CFTC) our expectations aligned with the actual behavior of oil traders.

The data indicate that traders of light sweet crude increased their net long positions by 33,439 contracts with contracts increasing by 6,187. Meanwhile, short contracts decreased by 27,252.

Since the end of September traders of light sweet crude have nearly doubled their net long positions. The net long positions are now at a level not seen since July 2014. A similar trend is being exhibited by the behavior of traders of Brent crude.

According to the latest data from the Intercontinental Exchange (ICE), the number of net long positions increased by 68,521 contracts. The long positions increased by 40,709 contracts, while the short positions decreased by 27,812 contracts. However, after the big increases in long positions we are expecting that traders will be more cautious this week.

Consequently, we are shifting our view that the sentiment of oil traders will be a positive factor to a neutral factor with respect to the price of Brent crude.

More justification for this forecast can be found at StratasAdvisors.com.

A Look Back

Before the beginning of last week we forecasted that the price of Brent crude would have upward support, but would not break through $53. The forecast was based on the expectations that support would be provided by the bullish sentiment of oil traders and the increasing level of geopolitical uncertainty associated with the major oil producers.

We also expected, however, that the upward support would be partially offset by the US dollar becoming stronger. The actual price movement of Brent crude aligned closely with our forecast. Brent crude started out the week at $51.93 then moved to $53.14 on Monday then fell back to close the week at $51.95. The weakness in the second half of the week was driven, in part, by the U.S. dollar, which strengthened from 1.120 with respect to the euro at the beginning of the week to close the week at 1.097.

We also forecasted that the Brent-WTI differential would continue to trade between $1 and $2 with respect to the December contract. In actuality, the Brent-WTI differential started the week at $1.55 then narrowed through the first part of the week to $1.17 and remained essentially unchanged to close the week at $1.20.

The narrowing of the Brent-WTI differential took place even though the inventory report from the Energy Information Agency (EIA) indicated that crude inventories increased by 4.85 million barrels during the previous week. The impact of the build in crude inventories was offset by the drawdown in product inventories, which by 1.91 million barrels, and the inventories of distillate fuel oil declining by 3.75 million barrels.

What’s Ahead?

For the upcoming week we are forecasting that the price of Brent crude will not have sufficient support to break out of a trading range between $51 and $53. We are also expecting that the Brent-WTI differential will trade between $1 and $2 with respect to the December contract.