In Energy

In my most early days on the floor, I had a ‘mentor’ of sorts – another trader with experience who I befriended, who gave me many insights into market action that helped me understand markets that often moved illogically and without regards to fundamentals or facts.

“In a bullish market, all news is bullish. In a bearish one, everything will be seen negatively”.

Boy, this week proved again how incredibly right he was about that.

We’ve had another week of just about the most pessimistic reaction to what should have been very bullish indicators in the oil market. And just about everywhere, we’ve seen those bullish fundamentals rewritten as bearish indicators – and watched as oil markets and oil stocks have sunk lower.

OPEC and Russia coming to a first time in history alliance to control supply for the next 9 months (and perhaps longer)?

The reaction: Couldn’t they do more? — and the markets dropped.

Trump pulling out of a Climate agreement that has hamstrung American energy?

The reaction: Oil companies will be hurt by the revitalization of coal – and markets tank.

Two massive unexpected drops in US stockpiles lead not to a gain, but a small loss in oil prices.

Yesterday’s unexpected build in stockpiles? – that leads to a ROUT of oil and oil stocks.

Morgan Stanley and Goldman Sachs’s bearish fear that global supply and demand wouldn’t re-balance in 2017 – proven clearly wrong – has reasserted itself as a bearish fear that shale production will increase another 1 million barrels a day in the next year and lead to a resurgent glut just as the OPEC production deal is rolling off.

Well, that won’t happen either – not at these prices at least.

It doesn’t matter whether much of what’s happening in the oil markets this week are nothing but a case of perception – and misperception. When markets are trending, and the participants are all thinking the same way, you cannot fight the force. In the last two weeks, there’s been nothing but pessimism floating around oil.

“… a bearish one, everything will be seen negatively.”

Of course, fundamentals always win in the end. But another piece of old wisdom I learned early on applies here: “markets can be irrational longer than you can remain solvent”.

A Recent case in point: Throughout 2013 and 2014, we saw the oversupply of more than a million barrels a day in the market adding inexorably to global stockpiles. Analysts delivered explanations almost too convoluted to believe, describing this glut building as perfectly normal and even bullish for prices.

Ultimately, these fundamentals were felt and oil dropped from over $100 a barrel to under $30.

Let’s look at today: Oil supply contracting? Check. Production rolling over in two of three major US shale plays? Check. OPEC deal to remove 1.6m b/d holding with unprecedented compliance? Check. Capex budgets still in collapse, making replacement of spent wells expensive, if not impossible? Check, check and check.

All of this will lead to a wildly bullish move in oil. But just as in 2013, don’t depend on staying solvent before it does. Care is required.

Of course, I’m going to point you to my webinar for lessons in just that kind of care. Next one is scheduled for June 19th at 4 PM. I hope you can join me.