Why Oil Prices Could Dive
WTI briefly touched $65 per barrel after the EIA reported a surprise drawdown in inventories — the highest price since late 2014. Although the rally hit some stumbling blocks in recent days, prices remain at multi-year highs. However, absent further bullish news, the downside risk looms large.
One of the most acute threats to prices is the exorbitant positioning by hedge funds and other money managers, who have staked out record net longs in the oil futures market. With everyone piling into one side of the bet, there’s little room left on the upside. This kind of lopsided positioning has consistently ended with a rush for the exits, setting off a sudden — and often sharp — price correction.
Mad Money’s Jim Cramer spoke about the problem on Tuesday on CNBC. “As of last week, large speculators were holding the single largest bullish position in the history of crude oil,” he said. “Being bullish is NOT a good sign … when everyone’s bullish, well, then, you don’t have anyone to convert to be able to start buying … You need to convert bears but there’s no bears.”
Cramer, citing data from Carley Garner, co-founder of DeCarley Trading, said the current makeup in the futures market points to a near-term price correction. “As Garner points out, when one of these massive speculative bets in oil unwinds, you do not want to get caught anywhere near the blast radius,” Cramer said.
Another force working against the current rally is the recent decline of the dollar, which has been weakening for the last several weeks. Since oil is denominated in U.S. dollars, a weaker dollar can put upward pressure on crude prices as crude becomes relatively less expensive to much of the world.
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