Relief Rally in Oil or an Uptrend?

crude oil

In the past month, WTI crude oil has rallied more than 25 percent, taking the commodity into positive territory for the year. The fundamentals haven’t changed, inventories are still full and the build-up may continue as refineries close down for maintenance. The rally started after Saudi Arabia, Qatar, Venezuela and Russia said in mid-February that they would leave supply at January’s levels if there was enough support from other producers.

Market sentiment has changed as more investors feel that the price of oil has made a bottom. John Watson, chairman and CEO of Chevron, shared his views on the energy market and oil prices in an exclusive interview with CNBC.

“We think we’ll be growing production into a rising market,” Watson said Tuesday. He added, “I think we’ve seen the bottom in oil prices.”

Oil buying was encouraged by talk that OPEC producers want a higher anchor price. Major news media reported that OPEC is privately talking about a new oil price equilibrium of $50 a barrel.

“While it may not be an official target price, you’ll hear them saying it. They’re trying to give the market an anchor,” said Gary Ross, the founder, executive chairman and chief oil soothsayer at New York-based consultancy PIRA.

The volatility in the oil market has been ideal for hedge funds and speculators to make some quick profits. It takes very little capital to buy oil contracts and the price movements have been spectacular. Market watchers believe that the majority of the price movement in oil has been due to short-covering.

Short positions in West Texas Intermediate crude by 15 per cent in the week ended March 1, according to U.S. Commodity Futures Trading Commission data. Speculators’ short positions in WTI fell by 25,639 contracts of futures and options combined to 150,718, the biggest decline since April 21, CFTC data show. Longs, or bets on rising prices, fell by 753. The exodus of bearish bets resulted in a 24,886-contract jump in the net-long position.

Traders seem to be pinning expectations for oil prices to one specific number now that crude has staged an impressive comeback this year. It’s going to take a close above $40 to reverse a long-term down trend according to many Wall Street technicians. The chart watchers believe that there is another wave of pain for the commodity. Most view this recent run up to be just another relief rally. They are looking for one more final washout, somewhere below $30, which would be a final capitulation.

Big bets by option traders

Options that allow their owners to buy crude oil for $40 or above have seen notably more buyers and sellers compared with all other strike prices. Calls that expire in May and June have higher levels of open interest at $40 than at any other level. On Monday, call contracts that expire in April saw the highest trading volume in the $40 strike

Millennials using a risky ETF to speculate on oil

According to online discount broker TD Ameritrade, Velocity Shares Daily 3x Long Crude ETF (uwti) was one of the top 10 stocks traded by millennials in 2015. What makes this ETF a risky product is the extreme volatility due to triple leverage. The leverage amount in UWTI gets reset each day which can make for some epic days when oil goes up.

However, it is a costly product because it suffers from roll over costs that come from tracking front-monthly oil futures. Although, UWTI was fifth on the list of stocks millennials were buying, it was fourth on the list of stocks that they were selling.

cautionThe Fed meeting next week could put the rally in oil on hold if their comments turn hawkish. Increasing U.S. interest rates will strengthen the value of the U.S. dollar which could cause the price of oil to fall. The meeting of OPEC and non-OPEC members to freeze production may not even happen.

Disclaimer: This content is provided for informational purposes only! It is not to be viewed as a recommendation or endorsement of any particular security.


2 thoughts on “Relief Rally in Oil or an Uptrend?

  1. Nice summary of the different opinions out there. It gets me up to speed nd provides material for reflexion.
    For now, I hang on to my oil stock. One pays a nice dividend. The other one is given as cover for calls.

    Lets wait and see.


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