Yesterday, to much fanfare from the online financial sites and business television stations, WTI, the benchmark for U.S. oil, broke through the $50 level. No sooner had the breathless talk of a complete recovery in oil prices begun, though, than it ended as WTI reacted to the level like a scalded cat and retreated as quickly as possible. This morning brought some attempts to explain why that rapid retracement occurred, but as far as I can see none of them have hit on what I consider to be the real reason.
In some ways it may seem that analyzing and attempting to explain what happened yesterday is a bit pointless; it is all over after all. Usually I would feel that way, but it is important that what happened yesterday is understood by anybody who trades oil, or for that matter any commodity futures from home, as it is not a rare phenomenon. To understand what caused the rapid retreat, you have to first understand what probably caused the run up above $50, and to do that you have to put yourself in the position of a desk or floor trader, a job that I did for nearly twenty years.
(Click to enlarge)
The above chart is for oil futures from 1 AM on Wednesday to early morning Friday U.S. Eastern time. When traders in the U.S. came to their desks at around 6AM they would have seen a chart that showed that oil had been basically flat for the last 6 hours. There had been an attempt to push lower that had failed, which suggested some support at around 49.70,…