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Why I Will Be Trying A Short WTI Position Again

Rigs

I am lucky enough to have a small group of dedicated people to whom I teach some of the lessons learned in my time in dealing rooms around the world and there is a mantra that I often repeat to my students…Only losers average losers. It was drummed into me by my first boss early in my career in forex, and was his way of saying that if you get a trade wrong, just accept it and move on. Averaging a losing position may often look tempting; I mean if you liked it at 40 you must love it at 10, right? The problem is, though, that the reason you loved it at 40 obviously haven’t panned out, which is why it is at 10. Buying more may give you a better average of 25, but it also gives you a larger wrong position, and that is hardly ever a good idea.

It is with some trepidation then that I effectively “double down” on my opinion that what has become known as the “OPEC agreement” is actually no such thing, and that the rise in oil prices that has accompanied it is, above all else, a good opportunity to sell. That isn’t to say that I am, nor should you be, doubling down on any positions. Any short position I may have had following the initial surge in price immediately after the news was cut a long time ago as the price continued going up. What it does mean, though, is that I am prepared to go to the well one more time.

Ironically, the reason I am looking to short WTI again as we edge closer to June’s $51.75 high is also connected to the “never average a loser” rule. After forcefully stating the rule, that same boss did actually take time to explain what should be done instead. His point was that having a position exaggerates our emotions, and the desire to average a loser is usually an emotional response. It is our pride, our arrogance and stubbornness, that make adding to a losing position seem like a good idea. If you cut first and think again then you take the emotion out of the situation, at least to some extent, and in that light it is easier to recognize where you went wrong.

I have done that in this case, and I believe I do understand where I went wrong, but an analysis of the situation still leaves me with the same fundamental view. What I did was to underestimate the effects of momentum in a heavily traded market. That there was any kind of agreement at all took a lot of people, including me, by surprise. That has led to a sustained move as short positions are squeezed out and breaks through resistance levels trigger automated trades. The fundamental factors that made me prone to short oil, however, still read the same way.

The agreement that came out of Algiers was not really an agreement to freeze production as widely reported. It was an agreement in principle to do so, but without specifics as to at what level to freeze, nor who will be allowed to produce how much, it is more of an agreement to attempt to reach an agreement than anything else. Iran and Saudi Arabia, two of the biggest players, remain mortal enemies and are fighting each other in two proxy wars in Syria and Yemen, so a breakdown in talks still looks at least as likely as an agreement.

In addition, as I pointed out last week too, an agreement to freeze production at or near current record levels that outstrip demand is hardly an OPEC induced shortage, and there is no limit to production in the interim. This week we heard that both the Iranians and the Saudis had decreased their official selling price, which in some ways isn’t as important as it sounds as prices are generally set by the market, but certainly doesn’t bode well for the future agreement. With wobbly growth in the U.S. and with the actual impact of Brexit coming closer to being known it could be a while before oil demand increases to meet the existing oversupply. Even if an agreement is reached it will take a while to work through existing stockpiles of crude, especially with the increase in supply from the U.S. that can be expected as a result of WTI over $50.

(Click to enlarge)

No matter how I look at it, I can’t see any reason to buy WTI, certainly not at these levels. Selling short anywhere close enough to June’s high to use that as the basis for a stop loss, on the other hand, looks to be a trade in line with the fundamentals as they stand with a decent upside and limited risk. As much as it looks like doubling down on a loser, then, I am going to stick with my view.




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