Tuesday, April 7, 2015

Crude Oil Hook

They hooked em.  The crude oil shorts got the hook.  The Iran nuclear deal news was the bait.  The fish bit in droves on Thursday.  After the Easter weekend, hook, line and sinker.  The fishermen are those that are long, who bought from the shorts last Thursday below 50.  I smelled something fishy last week when the market hardly went down ahead supposed upcoming "bad" Iran deal news for crude oil longs.  I got out before the deal, afraid of a counterintuitive bounce on the news, as shorts covered.

Well, WTI refused to go below 47, and spent most of the time trading between 48 and 50 as the deal was being negotiated.  After the deal, I am sure the shorts were just counting their money but the market doesn't work that way.  All the nervous longs already sold before the deal, and the eager shorts helped to keep the prices below 50.  With that pressure off after the deal, all you had were shorts in the hole and longs that waited to buy lower, being forced to buy higher or miss out.

What to do now that crude oil is almost 54?  The WTI-Brent spread is almost down to $5, and the super contango is gone, with a more reasonable $1.25 spread between May and June futures.  The market moves before the news, and it is sensing inventories stabilizing here, and with driving season coming up and refineries ramping up production of gasoline, the inventory builds are soon to be history and you will see continued upward pressure on prices as the nervousness of oil hitting storage tank tops dissipates.  It is now a market that favors the long side.  My crude oil short thesis was dependent on longs panicking out as they feared storage getting full, but its too late for that.  May is when inventory drawdowns historically begin, and last until the winter.  However, I will not play it, because the long term trend is still down, and I don't believe there is that much upside, but there is even more limited downside.

As for stocks, I think we are near a short term top, and believe we will have one more move down to ES 2035-2040, where I will look to be a buyer.  I will consider a small short tomorrow if we stay above ES 2075, targeting a move lower by Friday.  Concurrent with my short term bearish equity view, I am bullish on bonds.

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