Back on August 12th, just two short weeks ago, I laid out my reason for being bullish on oil, namely that I expected some serious “book talking” from OPEC members in advance of their September meeting. That bullish stance paid off as WTI, assisted by some OPEC chatter, climbed around 15% in the following week to nudge $50 per barrel. Then, earlier this week, something happened that convinced me to not just take a profit on that position but also consider reversing to be short.
Ironically what caused that reversal of sentiment was exactly what I expected to give prices a boost in the first place, a significant OPEC member talking their book. To be more accurate it was the market reaction to those comments rather than the comments themselves that gave me pause. On Tuesday the Iranian oil minister announced that they would be attending the talks on the state of the market, to be held at the International Energy Forum in Algiers on September 24th-26th.
That should have been pretty big news. Since international sanctions were lifted on Iran earlier this year that country has been trying to get oil production up to pre-sanction levels as quickly as possible, prompting their enemy Saudi Arabia to hit record production levels in an attempt to protect their market share. This battle was so intense that any kind of cap or reduction of oil production looked impossible. The Saudis had already announced that they would attend the talks, so the possibility of a resolution to the problem that has caused such massive increases in output, even as prices were falling, should, one would think, have caused a huge spike in price. Here is what happened.
(Click to enlarge)
When the news came out on Tuesday the price of oil, which had been trading lower than Monday’s close, did jump. As the day went on, almost all of those gains were given back. That indicates to me that the market had become at least wary, if not actually tired of the book talking. Without the benefit of the effects of the talk two factors, one technical and the other fundamental, come to dominate the outlook, and both suggest lower oil prices.
From a technical perspective, the chart also shows a “turnaround doji” when oil hit its high on Friday. A Doji is a candle that looks like a cross, indicating a battle between buyers and sellers that is essentially a tie at the end of the day. It is considered to presage a change in direction when, as in this case, it is preceded by a sustained move in one direction.
Regular readers will know, though, that I consider technical signals much less important than fundamental factors. Unfortunately for those rooting for higher oil though, fundamentals also point to a drop in price. The drop in price on Wednesday was, in part, due to an EIA inventory report that pointed to the basic problem. While we are in the season when draw downs of stocks should be the norm we once again saw a build. Add the still increasing rig count to that mix and it is clear that the production slow-down that came as the result of January and February’s lows in oil has reversed. The glut is back and growing.
That combination of traders’ ambivalence towards “news” that should have pushed oil higher, an earlier technical signal that indicated a push lower and a worsening oversupply in the short term all point to lower oil over the next few weeks. There is an old saying that minds are like parachutes, only useful when they are open, and that definitely applies in trading. When, as in this case, the evidence mounts that your previous view is now wrong you have to change it, and change it I will.