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MW: Potential for a big oil drop is growing, warns Commerzbank
Oil prices are trading close to a three-week high, but investors shouldn’t get too comfortable around the $50+ levels, warns analysts at Commerzbank.

In a note out on Monday, the bank’s commodities team points out that the energy market almost has become mores resilient to bad news and instead is choosing to focus only on the upside. West Texas Intermediate crude oil trading on the New York Mercantile Exchange CLH7, -0.61% —the U.S. benchmark contract—for example settled at the highest level since Jan. 6 on Thursday, even as data out the prior day pointed to a jump in U.S. inventories for a third straight week. Brent LCOH7, -0.98% the international benchmark—settled up 2.1% at $56.24 a barrel Thursday.

“The oil market is currently characterized by rather selective perception: bearish news such as the rising U.S. crude oil and product stocks is being ignored, as is the increase in U.S. oil production. Instead, even the most insignificant report of tightening supply—like yesterday’s news from the [North Sea Buzzard oil field in the U.K.]— is being seen as an opportunity to buy,” the Commerzbank analysts said.

“Given that speculative net long positions in Brent and WTI are already at a record-high level, the correction potential is therefore growing all the time,” they warned.

Oil prices have been seesawing above $50 a barrel in recent weeks on mounting expectations that the Organization of the Petroleum Exporting Countries and its allies will stick to their collective agreement, which began this year, to cut global crude production by about 2% to reduce a glut of oil and stabilize prices.

So far, there are signs the pact is working.

Over the last weekend, for example, OPEC and Russian officials said they were making good progress on their pledges to cut back oil production—with 24 oil producers making collective cuts totaling 1.5 million barrels a day—over 80% of the total pledged.

Crude oil has rallied 18% since OPEC completed its output deal in late November. Part of the rally has also been ascribed to a rise in speculative buying.

“The CFTC’s market positioning data that are due to be published this evening are likely to reveal a further increase in speculative interest in WTI. New figures from Baker Hughes should also indicate another rise in drilling activity in the US, which will probably be ignored,” the Commerzbank analyst said. In other words, most investors are buying oil futures with the expectation that prices will continue to climb on the back of the OPEC pact but they may be caught flat-footed on any bearish signals, including definitive signs that countries aren't adhering to output cuts.

Nagging worries that production could ratchet higher are centered on countries outside of the agreement, like U.S. shale-oil producers, which have shown signs that they are aiming to increase drilling for oil amid higher escalating prices.

For example, U.S. rigs drilling for oil, although they have mostly shown weekly rises over the past two months. As of last week, U.S. oil rig count was at 551, up by 29, according to Baker Hughes.

The weekly Baker Hughes rig count data come at 1 p.m. Eastern on Friday.