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Why Oil Prices Will Keep Falling

As you will be well aware if you are a regular reader of my musings here and elsewhere, I generally favor a contrarian trading style. That comes from years spent in the interbank forex market, where the intraday nature of most desks’ trading meant that trades became very crowded very quickly. Once a move got underway and gained momentum, it wasn’t long before nearly everyone was positioned the same way, a situation that skewed the risk/reward against that direction. If everyone is short, there are few left to sell, and even a small move up can induce a panicked rush for the exit…a classic short squeeze. And the same could happen the other way around too if everyone was a buyer.

Oil, though, is not forex.

In a forex trade, when you are short one currency, you are inevitably long the currency on the other side of the trade. If you buy USD/JPY, say, you go long dollars, but you simultaneously go short the yen that you bought those dollars with. That means that, at some point, you have to cover that short and square up. With oil, though, one side of the trade is a commodity…it can be used and consumed, and it is subject to supply and demand fluctuations. If economic conditions are bad and demand is falling, say, suppliers still need to sell their production, and will do so at ever lower levels rather than leave themselves with a big storage problem.

That means that moves can be sustained longer, and because of current conditions, we…

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  • Dr Yussif Sulemana on September 11 2022 said:
    Could these pursuits fall within the grand plan of nailing fossil fuels in the coffin to prop up renewables? That will undoubtedly be a daring move and a journey to terrains saturated with uncertainties. I believe our thirst to arrest inflationary pressures via the unchecked hiking of the policy rates would land us into recession faster than anticipated.

    How do you knock off an entire energy world that controls about 80% of global energy requirements? That is certainly going to be an arduous task even if the champions of that energy world were to sit idle without fighting back. A collaborative approach between these two worlds of energy (Green & Fossil fuels) will serve the world better than any form of approach that is antagonistic.

    EV champoin, Elon Musk calls for more investments into the world of hydrocarbon was a smarter one and one I would call collaborative.

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