Oil: Major Short Squeeze Around the Corner?

Crude oil just had the biggest weekly drop since the Persian Gulf War in 1991; since November 28 alone, oil is down 25 percent. Quite a drop.

The sentiment in the oil pits is that “It’s all about the economy” and “There’s not much that can be done right now to keep prices from falling off a cliff”. Major pessimism is set in and Merrill Lynch is even predicting 25 dollar oil.

For all that I can see, conditions are set for a major short squeeze in the Crude Oil Futures. Prices have dropped 72 percent since reaching a record $147.27 on July 11, so a short squeeze could take us to 60 or 70 dollars in a nutshell. At this time, technical analysis and fundamental analysis are saying “SELL” but the selloff is probably overdue. As Rockfeller used to say “the time to buy is when blood is running on the streets.”

What the catalyst might be for this short covering rally? Maybe OPEC, maybe nothing. OPEC`s President, Chakib Khelil, recently commented that no decision on the output cut has been made yet but it would be severe (full article on Oil Traders Blog). Oil might trade in the 60s before the end of the year.

Disclosure: no positions

Comments

[Shiv Kapoor:]

It is likely that oil will trade back up following the OPEC 12/17 expected cut. Much depends on how they present it. If they present the cut as being in response to an over-supplied market because of falling demand, then oil has further to fall. Such an approach does two things (1) enhances concerns on present demand and (2) alleviates concerns on future supply (because there is a cut to production not capacity).

If on the other hand OPEC is clear and says it like it is; i.e. they state (1) an intention to cut production capacity (i.e. no new production enhancing investment), (2) demand and supply are well balanced before the cuts, save perhaps the need for a minor inventory drawdown being required and (3) the cuts in production are intended to uplift prices towards an equilibrium price level; then oil should rally strongly. Hopefully, speculative excess will not drive it to sensless levels once again.

2008 Dec 08 07:45 AM

[john s. gordon:]

is a short squeeze compatible with all the unsold oil sitting around in tankers waiting for a buyer?
> jack

2008 Dec 08 08:19 AM

[svosavvy:]

imho
the opec cut pop is going on right now, only the bag holders will be waiting for the actual meeting announcement.

2008 Dec 08 10:10 AM

[jimmy46:]

THIS IS ABOUT THE MOST WORTHLESS BLOG I'VE SEEN YET

2008 Dec 08 01:47 PM

[absurdity....:]

I doubt it. All of the individual economies of OPEC members are built on at least $70 oil. They all have incredible incentives to cheat and it isn't as though they have true trust of each other. That and it's tough for OPEC to stomache giving Russia and Mexico a free ride on their dime.

Overall, fair market for oil is believable at $60-70 in a robust economy. A sustained rise above these levels makes oil shale and coal gassification pencil out from an economic standpoint, and the markets are presumably efficient enough to recognize that.

My prediction is that oil is more likely to test $33 than to go to $53.

2008 Dec 08 02:10 PM

[ValueInvestor:]

What is this short squeeze based on? Nothing?

I've just looked at the CFTC's commitment of traders report and both the commercial and large spec traders are net LONG, not SHORT. While this doesn't distinguish between contract months, it certainly gives a good picture of the overall crude oil market. In the event of a near month squeeze you'd probably see a one or two day squeeze followed by more selling. The same thing happened in September when all the newswires reported "oil up $25" but then failed to say "oil down $25" the next day.

2008 Dec 08 04:43 PM