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Liquidation by Hedge Funds Allows Oil to Gain Traction

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Liquidation by Hedge Funds Allows Oil to Gain Traction

Crude oil prices gained traction on Monday despite continued slowing in Chinese manufacturing as reported from their official PMI survey.  The better than expected Japanese Tankan helped lift petroleum prices, as large manufacturers continued to show strength.

The manufacturing readings in the world’s second largest economy continued to weaken as the official PMI came in at 50.1 vs. 50.8 in May and the HSBC final PMI was 48.2 vs. the 48.3 initial preliminary reading and 49.2 final May reading.   China continues to see a softening as the central bank sits on the sidelines.

The new government appears more committed to financial reforms and regaining control over the financial sector rather than trying to boost growth in the short-run. The PBOC in fact has watch as the Shanghai Composite has declined 21% to new multi-year lows from late May through late June, while passive tightening to continue.  The PBOC has created operations to alleviate the credit crunch and which could have possibly turned sentiment for oil prices.

Crude oil stocks remain relatively high as reported by the Department of Energy in its latest reading last week.  While analysts expected crude oil stocks to decline by 2 million barrels they remained unchanged well above the 5-year range for this time of year.  Gasoline demand has been tepid, reducing the demand from refiners to process crude oil stocks.

Hedge funds liquidated a large portion of long positions during the past week as reported by the most recent commitment of traders for the period ending June 25, 2013.  According to the CFTC, managed money reduced long positions by a whopping 28K contracts while increasing short positions by 1.5K contracts.

Crude oil prices are poised to test the upper end of the current large $12 dollar per barrel range near $99.20.  Support is seen near the 10-day moving average at 96.11.  Momentum is climbing with the AMCD generating a buy signal as the spread crossed above the 9-day moving average of the spread targeting higher prices on oil.

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