A massive rally in the oil market starting last Friday has everyone asking whether oil has bottomed. As for me, I’m not sure that’s the right question. Rather than finding an absolute low, I think this rally does a good job in setting the boundaries of oil trade for the next several months.
Everyone in the industry knows that virtually ANY oil price underneath $70 a barrel puts oil in an unsustainable range, in that there is plenty of oil, at least 8 million barrels a day, that doesn’t come out of the ground that cheaply. But does that mean that oil has to rally? Hardly.
Too many fundamental and financial factors still sit on top of this market, keeping a lid on oil finding it’s ‘correct’ price level and I’ve posited that oil won’t in fact find that level until at least 2 or 3 of these pressures are relieved. One of these pressures is the continuing production glut here in the US and indeed, another big increase in stockpiles on Wednesday stopped the oil rally, at least temporarily.
In terms of finding the lows of this market, before this rally some very wild numbers were being thrown around as to the absolute lows – I had heard some fairly intelligent analysts predicting $30 or even $25 a barrel. I think that this rally puts an end to the silliest of these bottom calls. We know oil is ‘dumbly’ priced here, but the market is at least beginning to put a limit on stupid.