There’s No Strong Fundamental Reason For Oil’s Decline

The oil markets continue to be gripped with the continuation of violent selling in the last week, displaying what I can only describe as a ‘traditional’ puking:

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Notice, over the last 5 weeks how consistent the pattern has been: a long downwards session candlestick, achieved under normally heavy volume, followed by 2-4 sessions of slower, digestive, lesser volume sessions that might attempt at retracement higher, but ultimately fail with another violent down-move under heavy volume.

This type of action is classic – and yes, it is definitely trend reversing, at least in the medium term. But more than that, it indicates just how convincingly hedge funds and other speculative accounts have been exiting longs, and in fact, begun establishing momentum shorts in the futures markets. This ‘two small steps up, one giant leap down’ is precisely indicative of this lone speculative trading pattern affecting the oil markets at large.

During these moments, you can take the fundamentals – no matter what they might say to you – and toss them. Until you see a stability in hedge fund positions, that selling pressure from longs reversing to shorts will override everything.

This financial pressure on oil has been helped along in every case by widespread media bashing of the oil complex. For example, several articles have delivered bearish headlines of OPEC reducing their demand forecast for 2019, and yet these forecasts still call for an increase of 1.3m b/d, an historic rise. Bloomberg’s Liam Denning continues to bash US frackers here and here. Moody’s has decided, in October of 2018, that oil services debt is unsustainable – despite being in far worse shape one and two years ago. Reuters is worried how the trade war will affect LNG sales. Don’t discount the effect that legions of negative press will have on the investors and speculators holding both oil and oil stocks.

Although – yes – there are some indications that this vomiting of positions will be reaching its end soon.  Again, I will point out the curve of prices, which should continue to move further into contango as the market disintegrates, if this is truly a fundamentally charged bear market we are headed into:

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I use JAN9-JAN0 as the representative spread for the curve this week, but just about any could do: Notice how the spread retained a steady value throughout the summer as oil was trending higher, and began to disintegrate as oil did, starting in the first weeks of October. But notice the hesitancy for the spread to move much below flat in the last weeks, despite oil’s continued drop towards $63. If there is a strong fundamental, systemic reason for oil’s decline, normally you’d see that contango continue on for a long as the decline does. Something else is going on here – and that is the overwhelming power of speculative position adjustments.

Obviously, we must keep an eye on the upcoming commitment of traders reports, not only to confirm the continued reversal of spec positions, which we can practically guarantee is happening, but also to see signs whether the OPPOSITE is beginning too – and specs are getting perhaps a bit too committed to an elemental bear market. Until then, rallies – even strong technical up moves – should likely continue to be sold.

By Dan Dicker