You Should Not Be Holding Oil Right Now

| About: The United (USO)

Summary

With the meteoric rise in oil prices over the last few months, many are choosing to enter an oil market at what is probably a temporary peak.

These investors coudl get left holding the bag if they don't understand current market dynamics.

In this article, I look at why you should be leaving the oil market right now, not getting in.

Oil (NYSEARCA:USO) has been on a meteoric winning streak over the last few months. Falling as low as $26, oil prices have steadily risen to almost $50. With oil prices skyrocketing, oil bulls are coming out of the woodwork to take deserved credit for their exemplary predictions - and to leave investors wondering if they can still get in on the opportunity.

A number of factors have lead to the sudden change of fortune. Political turmoil has partially shuttered a Nigerian facility, wildfires in Canada have caused drilling to cease, and petroleum demand has unexpectedly jumped. Incident after incident has piled up throughout 2016 to almost miraculously bring the oil market from a severe glut to a slight deficit. For those with the foresight to bet on a turnaround, a handsome reward has been reaped.

Prices can't climb forever, though, and significant selling pressure is likely to materialize in the current environment. For this reason, it's not a good time to hold oil. The risk/reward ratio for oil right now is not in favor of buying. Wait for some of the current issues to dissipate, most likely through a pullback in oil prices.

There are three major concerns I have for the current oil market. First, the supply that was cut off in Canada and Nigeria will eventually return, possibly not far in the future. This will certainly put significant pressure on prices as supply again overwhelms demand.

Second, many oil producers that were forced to stop pumping when prices fell are now beginning to find it profitable to pump again. Rising supply from these no longer dormant producers could also put a serious damper on oil prices. While there is some debate around the exact price point at which many producers could come back online, most agree it isn't higher than $50 per barrel.

Third, with a possibly imminent interest rate hike, there is a fair chance the dollar will rise in the next month or two. With oil being dollar-denominated, a rising greenback will depress oil prices. While there have been some exceptions in the past, it has usually not been a good idea to be long oil when the dollar rises.

Being long oil right now simply does not put the odds of profit in your favor - it's poor risk management. Eventually, the oil market will be ready for another round of buying. To say that time is now could, I believe, be a costly mistake.

Disclosure: I am/we are short WTI OIL CFD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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