I happened to have dinner this week with a very dear old friend from my days trading crude oil on the floor of the New York Mercantile Exchange.
Ultimately, our conversation turned on our life of trading oil, and the fascinating experiences we’ve had watching oil prices gyrate over the past nearly 40 years. We’d seen massive spikes together, equally disastrous crashes and years upon years when oil prices barely moved at all.
And, despite the many years we’d been observers and participants, we struggled to make even a few generalizations – even some small ‘unified theory’ of oil trading that could be confidently relied upon.
We both remembered moments in the past when fundamentals meant everything, and an unexpected draw or build in stockpiles would have an enormous impact on prices. At other times, they could have little to no impact on prices at all, and the EIA (or for us old timers, API) reports could be ignored. For example, global markets ran a million and a half barrel surplus in supply for two years from 2012-2014, but that surplus had zero downwards effect at the time on $100+ barrel oil prices.
Geopolitical tensions could be the only thing that mattered for prices at many points in the past 30 years. Few remember the first time Iraqi bombs fell at Kharg Island, an unknown Iranian refining site, but it caused the first three day limit-up price move in oil. The allied command bombs against Libya in 2011 provide a more modern event with also enormous effect, pushing prices well past $110 a barrel. At other moments, deep threats of Middle East unrest incredibly didn’t seem to matter in the slightest; as in 2015, when the ISIS advances in the Middle East threatening Iraqi/Kurdish supply did little to halt an ongoing price slide.
The crude curve and movements of the inter-market spreads would oftentimes indicate a coming, more substantial change in underlying prices – and then, for no reason we could fathom, predict absolutely nothing.
Technical indicators would be predictively faultless for months – and then completely fail.
But we hit on one constant we could both agree on: MOMENTUM.
And here’s where we get to something useful for all of us investing in oil stocks today.
Every bank analyst is convinced that oil is way overpriced. Every technical indicator for oil stocks is looking stretched. Hedge funds are almost universally long – to a degree not seen for years. If you’re watching the metrics most analysts rely upon, virtually everything points to oil taking a significant break and moving downwards.
Except that oil is riding a momentum wave. And, to be clear, it’s not just any wave. It’s a wave that’s been brewing through three years of a bust cycle and underperformance to virtually every other stock class.
And what I can tell you, from nearly 40 years of experience, is that you can temporarily throw out almost everything else you know if oil is in the midst of riding a momentum wave – whether that wave is up or down.
Take a look at the chart above. You wanna mess with that? You go right ahead. Me, I’m going to ride it. That’s what I’ve been telling you for the past weeks and it’s what I’m going to continue to tell you today. Let others chase a rising oil price. Let others try to figure out when the dip will come so they can get in. Let others stand in front of a speeding train.
That’s the one lone crumb of wisdom of 80 years of combined trading experience that I can give you today.
Of course it breeds questions: How long can we ride this wave? What are the signs that the wave are about to peak and die out? What will a long-term continuation of momentum look like?
The answers to these questions are again when the many years of engagement and experience begin to be felt. It requires the many tools that those 40 years in the business bring – the fundamentals, the geopolitical analysis, the technicals – and I will continue to bring that all to you when it matters.
But not now. Now is the time to be “stupid”, sit back, and ride the wave.