Another Day, Another Record

Analysts were struggling to find a reason for Thursday's spike in oil prices to $124.73. There was no news that could have been seen as negative and after the strong build in supplies in Wednesday's inventory report there is nothing in the news to produce the move.

Some analysts were again blaming the weak dollar but I have rebutted that argument so many times in these pages I am not going to waste the digital ink to do it again. Others blamed the potential for a surge in demand in the U.S. if the economy is rebounding as some think. That is possible but with gasoline surging closer to $4 a gallon that economic surge may be DOA due to sticker shock at the pump. Drivers paying $4.16 in Chicago on Thursday were not planning on doing any more driving than they have to.

Still other analysts continue to blame rising demand in India and China for the steady move higher. That claim may actually have some validity. Demand in China rose by 5% last month. Cars are pouring onto the highways in record numbers as more and more Chinese consumers make that life changing purchase.

Another group said statements from the OPEC Secretary General, Abdalla Salem El-Badri. On Thursday he reiterated his position that there is no need to boost production. He said several OPEC member countries were having a hard time finding buyers for existing supplies. He also noted that several OPEC country projects were coming online over the next few months and that would also increase supply. Personally I did not see anything bullish for oil prices in those comments. More supply is coming online and countries are having a hard time finding buyers for existing supplies. Sounds like we should have seen prices fall rather than climb.

I believe the spike today was based on several factors. Historically oil prices usually rise in May as traders take long positions ahead of the summer driving season. Long-term trends die hard and there are probably quite a few institutional traders making their seasonal play. Secondly, we are seeing some continued short covering. June crude futures expire in six days and during the May cycle we saw a huge short squeeze into expiration. Two weeks ago longs decreased 24% and shorts increased substantially according to the CFTC Commitment of Traders report. Those shorts are getting squeezed and new May cycle money is chasing the momentum play higher. It has nothing to do with supplies or news today but simply a bubble created by traders.

I do expect oil to go higher over the coming weeks. Maybe not straight up but definitely up. We are still a ways from hurricane season but after several mild years our luck may be running out. That will also create buying pressure but normally not until June. The key here is that the current spike in oil prices is NOT normal in any form. We are in a fear based momentum trade spurred onward by Goldman Sachs and their $150-$200 call earlier in the week.

Jim Brown

OptionInvestor.com