Last week, OPEC triggered a sell-off in January Crude Oil when it decided to refrain from making a production cut. The almost 10% break in prices was triggered by sell stops from those speculators taking long positions going into the meeting and from a handful of new short-sellers.
Those taking a long position were betting on a cut in output. The number being tossed around by traders ahead of the report was a cut from 30 million barrels per day to 29.5 million barrels per day. The size of this expected cut probably wasn’t going to be enough to stem the price slide over the long-run, but it probably would have been enough to give the short hedge and commodity funds an excuse to book profits and take to the sidelines until the next selling opportunity emerged.
The handful of new shorts who reacted to the report are most likely still short because the fundamentals haven’t changed and the technical trend is still down. Even with those two factors on their side, these traders are not without risk.
The purpose of this article is not to pick a bottom, but to find areas on the chart that could make the short traders who sold late in the move run for cover. Keep in mind that before a market begins a rally, something must happen to drive the short-sellers out of their positions. This is the next move that should develop. Once we get a bona fide short-covering rally going in the crude oil market then traders in gasoline futures and energy stocks should follow suit with their own short-covering rallies.
Last week, we noted that crude oil was probably closer to a bottom than the start of a new leg down. This was determined because of the size and duration of the break in prices since June. Had the OPEC decision occurred when crude oil was near a top then we would’ve looked for the start of a break, but since the market was already trading near multi-year lows, we assumed that the OPEC decision was already priced into the market. This is often called a “sell the rumor, buy the fact” situation by veteran futures traders.
Also supporting the notion of a “no” decision by OPEC were the various quotes from the more influential OPEC members such as Saudi Arabia and UAE who basically said they would do nothing to production at this time and allow the market to find its own support level.
When predicting that “we may be within days of a massive rally in prices”, we weren’t looking…