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Oil’s Big Drop: The Contrarian View

Rig

One of the first things I learned as I started my career in a dealing room was that, unlike in a marriage, on a trading desk being a contrarian made sense. You have only to look at the fickle nature of opinion to see why. Just a few days ago it seemed like everybody in the oil market was convinced it was going higher. OPEC’s cuts and the expected boost to U.S. growth from Trump’s administration led to everyone and their mom buying oil futures. I pointed out here and elsewhere that that huge ratio of longs to shorts in the market meant that vulnerability was to the downside, especially as the OPEC cuts could be offset by increased shale production in the U.S. and that the “Trump effect” was a hope rather than a fact at this point.

Sure enough, over the last couple of days we have seen the market turn as that increased U.S. production has become obvious, in turn leading to cracks seeming to appear in OPEC’s much heralded agreement, and with it opinion has shifted and everyone is bearish. Now that we are here, though, it is necessary to once again take a contrarian view. Now that everybody seems convinced that we are dropping back to the low $40s for WTI it is getting close to the time to buy. I can see somewhere around $47 being achievable over the next few days, but around there or at the first sign of a turnaround I would be a buyer.

(Click to enlarge)

The crazy thing about this move is that the conditions that have supposedly…

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