Why Oil Failed To Rally Further

Oil prices have been on a tear for the last month or so. A combination of a retreat by the dollar from its highs, increasing signs that low crude prices were finally taking their toll on U.S. production and supply disruptions in Canada, Nigeria and parts of the Middle East fueled a rally sparked by a reduction in the pessimism surrounding global growth. The mood was so optimistic that WTI futures even broke through the $50 mark, at least momentarily. The last few days, however, have seen a massive reversal in the tone of the news.

This week started with the Organization for Economic Cooperation and Development (OECD) issuing a gloomy forecast for global growth. In their semi-annual report, they identified a "low growth trap" and stated that the governments of the world's major economies needed to take "urgent action" to stimulate growth. That was bad news for an oil market that is still oversupplied, but prices held up on the hope that OPEC would come to some agreement at their meeting held this week.

That didn't work out too well, however. Cartel leaders emerged from their meeting yesterday without any agreement to even cap production, let alone cut it as a few had suggested. Incidentally, the fact that those leaders felt the need to reassure the world that OPEC was "alive and well" is another worrying sign. Maybe I am too cynical, but it reminds me of the quote from the Bard…"Methinks the lady doth protest too much."

Despite all of that, though, WTI quickly rebounded on a decent EIA inventory report that showed U.S. stockpiles declined by 1.4 million barrels over the previous week. That is certainly welcome news in the short term and the reaction in spot and short dated futures was logical, I guess. What was overlooked, however, was that even after that draw down, oil inventories remain at record highs for the time of year. Still, most of the losses that came after OPEC's announcement were recovered on the news.

Then, just this morning, came more bad news. The U.S. jobs numbers released at 8:30 were a major disappointment, with 38k added as opposed to expectations for 120k. That confirms the fear that many of us have voiced that the U.S. economy, one of the few bright spots in the global picture, is going through a wobbly patch at the very least.

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WTI futures have, until now, held up remarkably well considering the flood of negative news. That is in part for technical reasons…the push up above $50 will have squeezed out a lot of shorts and discouraged further short positions…and in part due to the underlying news about U.S. production. Oil is a global market in some ways, but WTI is U.S. centric after all. It is hard to escape the feeling, however, that eventually all of the big picture, fundamental drags on oil will have an effect. For that reason I am sitting with a small long position in DWTI, the 3x leveraged Bear WTI ETF and am content to do so.

Just a week ago many were opining that oil would surge through $50 and on up. After learning this week that OPEC intends to fill any supply gaps and push on at record production levels and that the U.S. and global economies are stumbling, that looks unlikely. In fact, when you add in possible dollar strength as the Brexit vote approaches, a return to around $40 looks more likely than a clean break of $50, even from these levels.