Oil Poised to Decline: ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) and VelocityShares 3X Long Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return (NYSEARCA:UWTI)
Educated investors watching oil prices this week so far can witness the overwhelming bullish nature of investors in oil at this immediate juncture. The extent to this bullish posture was revealed prior to this weekend's DOHA meeting by OPEC and the IEA, defining the bullish bets that currently exist in the oil space to be near all time highs, which is approximately 600 million barrels of oil. To put that another way, bullish investors own about 600,000,000 barrels of oil as they placed bets on higher oil prices.
When bullish investors rest their hat on something to that magnitude it is often very tangible in the open market. Stock market investors hear it all the time, but this is not isolated to the stock market, we can see that in the oil space investors also discount bad news and embrace good news when they have exposure like investors currently due to oil. The problem is, anyone who is listening carefully can see that a fundamental change may be on the immediate horizon.
Before I continue, it's important to recognize that I also have a longer term bullish outlook on oil prices, but mine near term observations are significantly different.
Many of the current pundits in the oil space are proclaiming that oil's bottom has been defined, and that's good, but that doesn't mean that oil prices will move straight up. In fact, based on fundamental shifts that we expect in the almost immediate term, the risk heavily ways on the opposite end of the scale. The probability for a material decline in oil prices is high.
Although there are other factors that allowed oil to move higher after the failed meeting, the most compelling is the strike in Kuwait. So far that has removed about 1.2 million bpd from global production, and that brings global production much more in line with global demand, but the strike in Kuwait is not long term, it is not expected to be long-term at least, and Kuwait has clearly said that it will meet its monthly production targets regardless of this strike.
As an offsetting catalyst to the failed meeting, the strike has had influence, but once the strike is over that supply is likely to come right back online.
In addition, and more importantly, anyone who has been paying attention to what Saudi Arabia is doing understands that Saudi Arabia is on the brink of unleashing an additional 1 million bpd of global supply to capture additional market share. That means that global supply will far exceed global demand currently if both the strike in Kuwait comes to an end and Saudi Arabia increases production.
We expect both of these to happen imminently.
Reasonably, Russia may also try to increase production, but we do not believe that Russia has the ability to do that meaningfully, but Russia will add to the headlines.
The headlines have recently been in favor of higher oil prices even after the failed meeting, but the catalysts that caused oil to recover from Monday's lows are not only likely to come to an end, but the discussion will most likely shift back to oversupply in media headlines, causing oil prices to fall yet again.
Be extremely careful with positions in ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) and VelocityShares 3X Long Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return (NYSEARCA:UWTI) as a result. The time will come o buy these again, but the time is not right now given our observations. In fact, quite the opposite: Proshares Trust II (NYSEARCA:SCO)
Trading Oil Discussion: On Wednesday, 4.20.16, Thomas Kee will answer questions directly related to Trading Oil in an open format (no registration required). PARTICIPATE IN THE DISCUSSION