The oil market has been highly volatile in the recent weeks, being pulled up to the $44 range apparently for no good reason.
Initially the rise in oil from the $20 to the $40 range was backed by OPEC ministers’ promises of a sure-thing production freeze to be agreed in Doha (which would be essentially meaningless if production were to be frozen at current levels). However, not even this has happened, so it is not clear why oil hasn’t corrected dramatically. Yet.
We know that financial markets today are disturbingly moved by headlines and hopes, more than by technical patterns or fundamentals. Still, Ridge Capital Markets believes that this is a situation which cannot be held for much longer.
In our view, either something fundamentally changes that supports higher oil prices (such as an actual production cut that involves Saudi Arabia, Iran and Russia), or a sharp downward movement is to be expected any time soon.
Think about it. With sanctions out of the way, Iran is about to bring many more million barrels per day of Oil into a market that is already oversupplied. In fact, 29 million barrels of Iranian oil are currently in the line to be sent in tankers to reach markets soon. Saudi Arabia said that it could increase its production even more (and it’ll do so for as long as Iran is flooding the market with its own oil). Russia has recently increased its production. Oil storage capacity is at its lows, and the world demand for oil is not rising anywhere near the levels that would be required to absorb all this supply. In fact, problems in China keep building up without any solution in sight, and a deflationary shock coming from China can be reasonably expected to happen soon – which could send oil to the $10s.
In face of all this, who can believe that oil can stay at these levels – let alone go higher? Unless a significant war is started, or a dramatic event leads to an agreed or unplanned production cut, oil can only go down from here. Not even central bank easing can keep up oil, if there is too much supply and too little demand – unless, of course, there’s a major currency collapse out of a sudden.
This is why Ridge Capital Markets believes that there is an excellent opportunity here – shorting oil at these levels, and especially if it threatens to near $50 and doesn’t break out from there, is a perfect short trade that we believe can make a lot of traders a lot of money.