Crude began to rally early Thursday as U.S. commodity markets opened on positive news that 2008 Q4 GDP numbers were not as terrible as expected. Futures prices are completely ignoring the stockpiles of crude throughout developed countries, in the Arab world, and floating off-shore in tankers. While WTI crude futures were trading below $45/barrel they were argued to be cheap, since which time markets have priced the black gold commodity higher by 20%. The previous levels were optimistic that demand would increase and macro economic data would turn favorable.
To traders who profited from buying DIG or USO while crude was trading near $40/barrel, congratulations, take profits and reverse it. The "re-flation” trade, Chinese stimulus promises, and Thursday's less terrible than expected GDP report have provided enough froth for commodities to float above realistic valuations. Now is the time to take account of the meaningful forward indicators of economic activity and detach the rear view mirror.
The supply of crude grew by 3.3 million barrels compared to 2.0 million barrels the week before, according to the EIA Petroleum Status Report on Wednesday. U.S. inventories of crude are at levels above 360 million barrels and are higher than at any point in the last three years. Refiners are operating at 82% capacity with room to scale up production over time, yet draws in gasoline supply won't have an immediate impact on the prices of crude due to supply gluts. Refiners will moreover be less inclined to scale up production given jobless claims data released Thursday, which suggests it is unlikely that U.S. consumers will increase their consumption of fuel.
The long term trend of crude oil will be to the upside, but the immediate macro and micro economic threats make the case for active traders to short the USO, while a substantial pullback of crude towards $40/barrel will offer an opportunity to get long USO for "buy and hold" investors.