Has The Oil Correction Started?
One week ago, I published a piece in which I showed how large funds (also considered to be “dumb money”) had accumulated a massive bullish position in crude oil, which increases the risk of a major liquidation sell-off. Little did I expect that the sell-off would begin within days of publishing this warning.
In that piece, I also showed how West Texas Intermediate (WTI) crude oil was climbing within a channel pattern and that a breakdown from this channel would give a bearish signal. Sure enough, WTI crude broke down from this pattern, which increases the probability that it will attempt to gun for the next uptrend line that started in July.
Source: Finviz.com
The long-term WTI crude oil chart shows just how extreme the positioning of the “dumb money” and “smart money” (commercial hedgers) is. The “smart money” have a short position of approximately 700,000 net futures contracts, which is an even larger position than they had before the 2014 oil crash. If crude oil’s breakdown continues, the $40 per barrel long-term support level should be watched as a likely price target.
Source: Finviz.com
Brent crude oil experienced a channel breakdown today that is very similar to the breakdown in WTI crude oil.
Source: Finviz.com
The 13 percent drop in the U.S. dollar over the past year has been one of the major drivers of the crude oil rally (the dollar and crude oil trade inversely). The “smart money” has been bullish on the dollar despite its weakness, which means that a rebound is likely in the not-too-distant future. A rebounding U.S. dollar would likely cause a correction in crude oil.
Source: Finviz.com
The euro is also worth watching, and is positively correlated with crude oil and inversely correlated with the U.S. dollar. The “smart money” has been building a sizable bearish position in the euro, which increases the chances of a correction in crude oil and the euro, and a rebound in the U.S. dollar.
Source: Finviz.com
This week’s technical breakdown in crude oil is quite concerning, especially when combined with the sharp stock market rout. Risk assets are starting to price-in tighter monetary policy and are reacting violently. If the breakdown in crude oil continues, it will drag energy stocks even lower, which would put even further pressure on the overall stock market. Even more worrisome is the fact that U.S. GDP and earnings growth over the last two years has been largely driven by the rebounding energy sector, as Lance and I have been saying. Stay tuned for more updates.
Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Real Investment Advice is expressly disclaims all liability in ...
more
Interesting article but demand needs to be factored in as well. That is increasing. I had my own views published on SA a while ago and I have not changed them. I was wrong about prices - they exceeded my guess and I doubt they will go much lower from here. seekingalpha.com/.../4114905-black-gold-political-vs-practical
Oil has already corrected. I feel it is a little bit overdone, however, the money losing pumpers are still around so I guess maybe its not. What it does reveal is that inflation is not the issue for the volatility. It is merely the terrible US treasury auctions that revealed how little control the Federal Reserve has floating more treasury notes at this yield with the expectation of massive US deficits on the horizon again.
Thus the market downturn is justified and the banter about inflation is just a bunch of garbage. This inflation explanation is a lot less scary that the fact that the US got a massive thumbs down by its creditors on its debt.