Shiv Kapoor

Oil: Major Short Squeeze Around the Corner?

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.