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Oil’s Rally: Short Squeeze Or Sustainable?

Over the last few weeks I have reiterated several times my belief that the mid $40 level would provide support for WTI crude, and so far that looks to be the case. There is nothing magical about that level; my view was based solely on the proximity to the lows seen in the depths of the recession. Even when things are going right, though, traders are programmed to look for reasons that the obvious move may not be the whole picture, and the ferocity of the bounce has me wondering…Is it just a squeeze after hitting a logical level, or is it a sustainable move back up?

Of course, without getting into the minds of the traders and fund managers who are buying there is no way to be sure, but looking at other markets can at least offer some degree of corroborating evidence to the theory that we have actually found a bottom. While the dramatic fall in crude prices was largely the result of a supply shock, there were other factors that contributed. Fear of a global slowdown and a strong dollar were also in part to blame for the drop.

It will take a while for the supply factor to self correct, but so far earnings season in the U.S. has seen a host of domestic producers indicating reduced capital expenditure and head count. If the demand outlook is somewhat better and the Dollar shows signs of a retreat from the record highs then we can be more confident that oil can stabilize, or even recover significantly, before those changes control supply enough to restore balance.…




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