I’ve been trading oil and learning about oil companies for 30 years, and one thing I can tell you is that the common wisdom about the oil market is almost always simplistic, unreliable and wrong. I was openly bullish on oil as it approached $90, because I know that the strength of the dollar is a spurious trading connection that has never been as strong as right now.
I also don’t believe in the commitment of the Saudis to a price war – today’s report showed that, true to form, the Saudis cut production in September to match their drop in the OSP. But they also know that their unilateral production cuts can’t make much of a difference on their own, at least in the short run, hence their expressed comfort with lower oil prices.
I further found it hard to believe that inventory reports showing domestic oversupply would matter much – we had been laboring under a secular oversupply situation for close to a year, rallying for most of that time.
But, despite how bullish I was at $90, I’m also convinced that although oil in the $80’s will be temporary, it won’t be short-lived. And I know how inconsistent that sounds.
I’ve traded this market for decades, written a book and several hundred columns and one thesis on oil and what continues to inform my thinking more than any other analyst are the financial inputs into oil. I watched as the speculative trade that has been a bedrock of higher oil prices began to disappear during the summer months, falling to the lowest levels I had seen in two years, and this also convinced me that prices were about to turn around. Traders away on summer vacations and hedge funds under pressure from falling commodity prices everywhere were about to reinitiate positions as their kids were going back to school.
And then the bottom fell out.
Now, spec positions are nearing levels I saw during the financial crisis of 2008, as the last of the hedge funds throw in the towel and wait for the avalanche of redemption requests they’re sure to see. While this is again a great reason, maybe the best one, to get long oil for the long term, it is also not a reason to believe that this will be a V-bottom or a short ride in the $80’s.
Several times in my career I’ve seen an exodus from the oil trade as fast and panicked as this one, and I can tell you that the recovery is…