The March-April WTI crude market had been trading firmly, supported by OPEC+ voluntary cut commitments and receding Middle East ceasefire hopes. In May, this dynamic shifted. Two primary factors drove the change.
First, easing Middle East and Ukraine tensions. The geopolitical risk premium contracted, reducing the rationale for maintaining the long positions speculators had accumulated. Second, intensifying higher-for-longer rate concerns suppressing fuel demand. The persistence of inflation entrenched a 'higher-for-longer' rate recognition, causing demand-side downward pressure to materialize. The convergence of these two factors converted the prior firmness into soft price action.
March-April firmness was supported by 'supply risk.' May's softness signals that 'demand concern' has taken center stage. The handoff between two different forces — supply and demand — changed the character of the market. However, because both remain in balance, no strong directional movement has emerged.
The concept this paper most importantly records is the '$79 short-squeeze completion.' In the March 26th report, the author noted that the $79 average level had transformed from a 'resistance line for profit-taking and fresh shorts' into a 'support level for fresh longs and buy-backs,' with fresh buying confirmed above that level. This 'character change at $79' was what supported the market's firmness.
By May, however, this short-squeeze above $79 had run its course. Participants who had entered new long positions completed their position-building and entered a 'waiting for the next catalyst' mode. When the 'engine of the rally' — the short-squeeze — stops, the market loses directional conviction.
The concept of 'short-squeeze completion' provides an important perspective for understanding market direction. When the phase where buying leads and pushes the market higher (short-squeeze) ends, the market enters a 'runway period' searching for what will become the next engine. What becomes that new engine determines the character of the next trend.
The most important observation from May's CFTC data is the internal contradiction of net open interest and trader direction pointing opposite ways. Net open interest (aggregate speculative positioning) shows partially bullish positioning (long additions). Meanwhile, traders (commercially-oriented participants) are showing a bearish directional bias (short).
This 'speculators bullish, traders bearish' contradiction reflects the market's inability to reach consensus on supply-demand direction. Speculators are tilting bullish looking at future supply risk; traders are tilting bearish looking at current physical demand weakness.
Phases where speculators and traders point in opposite directions are the most direct evidence of directional vacuum. When both align in the same direction, a strong trend emerges. Currently, directionless movement is likely to continue until one side 'capitulates.'
An important change is progressing in the forward curve. Backwardation that had been expanding since February peaked out in mid-April, and after a month of adjustment and correction, is now settling into a flat structure.
This change clearly reflects shifting market recognition. Expanding backwardation reflected 'physical tightness and supply risk concerns.' The shift to flatness means those concerns have retreated, with recognition shifting to 'present and future supply-demand are broadly similar.'
A flat curve in a 'not testing anything' state signals the market is in 'standby mode' awaiting the next catalyst. When the flat curve begins moving in one direction, that is the signal for the beginning of the next trend.
May 2024's WTI crude market continues without directional conviction or clear motivation as bullish and bearish forces remain balanced. The view of firm trading within the $75–80 range for the near term is maintained. The $79 short-squeeze completion, the backwardation peak-out, and the divergence between speculators and traders — all three signals point to the same conclusion: 'this is not a phase for testing turning points.'