Usually, when a market move makes no sense to you, it is you that is wrong. As my old dealing room boss loved to say, or rather shout, the market cannot be wrong. It is simply a reflection of the last place two people were prepared to trade, so it is always right. Still, there are times when I look at a move and just scratch my head. Now is one of those times.
Over the last month or so, WTI futures (CL) have shot up around forty percent. Given that U.S. supply has been falling as the economic recovery from the shutdown continued and that that is reflected elsewhere in the developed world, that makes perfect sense…up to a point.
That point came this week, when the move up continued to a new nine-month high, even as some of the factors that have caused it started to look a bit wobbly, to say the least.
On the demand side, the world, and the U.S. in particular, is seeing a resurgence in Covid-19 cases, hospitalizations, and deaths that have resulted in a return to partial shutdowns in some states and the prospect of more to come. Of course, I understand that there has been significant progress on the vaccine front and that the U.K. has even begun the rollout of one version but what does that mean in the short term for U.S. demand?
To be honest, very little. Health experts are saying that even if one or more vaccines become available before the end of this month, other restrictions will probably have to stay in place for at least several months…
Usually, when a market move makes no sense to you, it is you that is wrong. As my old dealing room boss loved to say, or rather shout, the market cannot be wrong. It is simply a reflection of the last place two people were prepared to trade, so it is always right. Still, there are times when I look at a move and just scratch my head. Now is one of those times.
Over the last month or so, WTI futures (CL) have shot up around forty percent. Given that U.S. supply has been falling as the economic recovery from the shutdown continued and that that is reflected elsewhere in the developed world, that makes perfect sense…up to a point.
That point came this week, when the move up continued to a new nine-month high, even as some of the factors that have caused it started to look a bit wobbly, to say the least.
On the demand side, the world, and the U.S. in particular, is seeing a resurgence in Covid-19 cases, hospitalizations, and deaths that have resulted in a return to partial shutdowns in some states and the prospect of more to come. Of course, I understand that there has been significant progress on the vaccine front and that the U.K. has even begun the rollout of one version but what does that mean in the short term for U.S. demand?
To be honest, very little. Health experts are saying that even if one or more vaccines become available before the end of this month, other restrictions will probably have to stay in place for at least several months after that. And that is assuming that massive amounts of the vaccine can be produced and distributed and that everybody will take the shots required, both of which look far from certain at this point.
So, demand could remain sluggish for a while longer, and the picture on the supply side is, if anything, even more bearish.
I am writing this before this week’s Baker Hughes Rig Count numbers are released, but the count has been climbing steadily since the low in August, and another 10 were added back last week. The collapse was clearly overdone and there had to be a recovery, but at this point, the continuation of that recovery is based on assumptions about the pace of a bounce-back in the economy that now looks questionable.
The international supply picture isn’t encouraging either. OPEC+ this week agreed to relax their production curbs somewhat, increasing output by 500k barrels a day, starting in January. That announcement actually sparked a rally in crude as there had been rumors of a much bigger increase, but it still means more oil coming onto a market with weakened demand.
At some point, all this will balance out; it always does. That is the beauty of markets. For now, though, oil prices are rising as supply increases and demand looks set to at best flatten out, if not to actually decline for a while. Economics 101 tells you that is not sustainable.
It was drummed into me early in my career that markets can’t be wrong, but that doesn’t mean they always have to be logical, and hitting multi-month highs just as both supply and demand are starting to send bearish signals is not logical at all. Still, I also learned a long time ago that markets can stay illogical a lot longer than you can stay solvent, so I am not in a rush to go all-in on a short CL position.
What I am doing is taking some profits on oil-related stock plays, such as HP and SLB, both of which I recommended here on November 13th and which are up around fifty and thirty percent, respectively. And I’m looking for evidence of a turnaround in crude; something like a double top that would form an obvious resistance level, and when I see it, I will look to set up a small, low-risk short position that can be added to if we do see a significant drop.
Mostly though, as is so often the case, I am looking on and reminding myself that my take on the situation is far less important than the collective take that the current price dictates and that, even though I am convinced I’ll be right at some point, patience is, for now, the greatest of virtues.
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