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An Obvious Oil Trade That Still Has Potential

Many traders tend to overcomplicate things. They believe that because financial markets and the relationships between them are inherently complex, only complex systems and analysis should be trusted, and the only idea worth considering is the obscure one. In reality though, successful trades are often found by ignoring all of the complexities and simply doing the obvious. Right now, for example, there are two contradictory forces in the global oil market that suggest an obvious trade, yet I’m sure many people are looking beyond that.

Those two forces are both on the supply side of the equation.

Globally, supply is tightening. The U.S. sanctions on Iran were reinforced this week when the White House essentially revoked the waivers that were granted when the policy was originally put in place. That will lead to reduced exports from Iran at a time when the OPEC plus group, aggressively led by Saudi Arabia, are still cutting their production.

In the U.S., on the other hand, as this week’s inventory numbers once again indicated, output is increasing. Crude inventories increased by 5.5 million barrels, even as refinery inputs jumped by over half a million barrels a day. It is always dangerous to read too much into one weekly data point, but this is a continuation of a trend and is only logical. As the OPEC group’s actions have forced the global price of crude higher, so it makes increasing sense for producers in the U.S. to step up output to take…

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