Wicked isn't it? Confidence built strongly over the course of last year that the oil price had made a
decisive bear market low just under $27 bl. in Feb. 16. What followed was a powerful seasonal
rally into Oct. There was seasonal weakness afterward, but since Nov. of last year the market's
trading pattern has been somewhat off - kilter seasonally as debate has focused on whether
OPEC / Russia production cuts would allow rising demand to balance off supply such that, by
later this year, we could see crude rise to $60. By early 2017, speculative long positions in the
oil futures market had reached record levels. That intense speculation plus already dramatic yr/yr
% price momentum produced a dramatic overbought in the market as I suggested in posts earlier
this year. I argued that there would be at least a price "hiccup", and we have seen such over the
past couple of months after the normal or seasonal round of price strength over the Feb. - Apr.
failed to pan out. WTIC Daily
Indicators reveal a marked improvement in global economic demand over the past year. However,
the rate of progress may have peaked, at least temporarily. On the supply side of the oil equation,
US output recovery has exceeded earlier expectations, with the NA rig count having more than
doubled since last May and capacity utilization at the well head now having risen to over 93%.
Even Libyan crude output is topping expectations. So, the story of supply / demand balance this
year is less sturdy now than it was. Moreover, speculative long positions in the oil future have
been sharply reduced, but are now in a gray area where further liquidation cannot be discounted
even if the pace of redress slackens. Seasonals have not been that important, but it should be noted
that Jun. ahead is normally a weak month.
The upshot here is the game of guessing on the direction of the oil price is now more tenuous
in the near term. The technicals here are mixed. The oil price is in a volatile short term down-
trend and is behaving poorly against its 200 day m/a for the first time in quite a while. On
the plus side, the market is oversold and even though timing measured in days is not sure,
there is a rally out there before too long.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!