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How To Survive This ‘Traders Market’ For Oil

It is hard to escape the feeling that, at some point, oil will bounce back. The dramatic yet sustained decline in WTI suggests to those familiar with markets that when that bounce comes it will be quite rapid. The assumption is that there are enough long term short positions that an upward move will be exaggerated. That may be true, but fundamental supply and demand always trumps technical or market positioning factors in the long term, and those figures suggest that we are not at that point yet. The latest IEA numbers indicate that in the fourth quarter of last year oil supply decreased from Q3 slightly, but still exceeded demand by 390,000 barrels per day, and that doesn’t include the Iranian oil that hit the world market this month.

As long as that disparity between short term technical influences and long term fundamentals exists there will not be a sustained recovery in price. What there will be, however, is volatility. Yesterday (Thursday), the reaction to the inventory numbers for U.S. oil demonstrated how that can lead to illogical market moves. The build in inventories of 4 million barrels was significantly more than the 2.4 million original estimate and the report also indicated that U.S. production had barely moved, remaining around 9.2 million barrels a day. Logically that should have prompted another move down, but instead we saw one of the biggest one day gains for months. That move has been attributed to a “could have been worse” reaction…

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