Trading Oil after DOHA: ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) and Proshares Trust II (NYSEARCA:SCO)

Why aren't oil prices weaker after the failed DOHA meeting?

At the onset of trading on Sunday oil prices were lower by more than 6%, but at the time this article was written oil prices were down only by about 1.5%, and during Monday's early morning session oil prices had risen from their lows.  Pundits would argue that oil prices should be lower; they might say that oil prices increased in anticipation of an agreement, and therefore they should fall now that the efforts have failed.

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In many ways, they're right.  Expectations were running high, institutional investors amassed approximately 600 million bpd of bullish bets leading up to this past weekend's event, and it is only reasonable to expect many of those bullish bets to be taken off the table now that the meeting has failed, but those institutional investors are not going away easy. 

There is not an immediate panic and that's largely because some of them believe the fundamentals were improving leading up to the meeting, and impart the fundamentals help support prices, even though there was an anticipation for an agreement that would cap production, but even that was discounted by those same bullish institutional investors proclaiming ahead of the meeting that a deal would have little impact on the supply and demand for oil in the global market today.  A deal, if one were to have a merged, was not expected to be representative of anything other than coordination.

Therefore, the failure of this past weekend's meeting simply suggests that coordination amongst those representative countries is not cohesive, and that is not a good thing, but it also doesn't change the perceived improving fundamentals that many of the institutional investors also rested their hats on when they decided to amass a near record amount of bullish bets on oil.

Arguably, however, the improving fundamentals are not positive, they're just less negative, and oversupply still exists, and is expected to continue to exist, and not until a year from now is the oversupply expected to balance, but even if that happens there is still a glut of excess supply that needs to be worked out of the system before the current production rates balance with current demand rates on a global basis.  Therefore, the argument about improving fundamentals is not a near-term argument, but a longer-term argument, and if nothing else changes a valid one on a longer term basis, but given the failure of this past weekend near term volatility must be expected.

In addition, it is important to recognize the changes that are taking place in the supply and demand equation for oil globally, and that starts with some erosion of supply in the United States.  Subdued oil prices will cause additional bankruptcies in the United States and reduce supply accordingly.  The problem is, Saudi Arabia may be very willing to increase supply, and it could do it at any time.

Saudi Arabia has made it clear that it can, immediately, increase production by an additional 1 million bpd, and if they do that would significantly disrupt the near term fundamentals, but it might actually improve the long term fundamentals for global oil prices.  If Saudi Arabia ads production as they said they can immediate reaction is likely to be negative because immediately there will be a significant oversupply and no immediate offsets, but the lower oil prices will accelerate the process of taking some of the supply out of the market, and it is that which can allow the longer term fundamentals to improve, and if the Saudis act the longer term improvements might also come faster.

Over time, the fundamentals in oil seem to be on the improvement trail, almost anyone looking at this objectively agrees that a few years from now oil prices will look much different than they do today, but given the near-term fundamental risks it is very uncertain as to what oil prices will look like a few days or a few weeks from now, but we do have a strategy in place.

Clearly, if Saudi Arabia has its way or oil prices will decline slightly and remain subdued over the near term and bankruptcies in the United States will accelerate.

Oil Strategy:

Stock Traders Daily has been actively offering its clients trading strategies using ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO) and Proshares Trust II (NYSEARCA:SCO) over the past few weeks.  On Monday SCO positions were closed early in the day and short-side profits were secured.  New strategic signals may surface at any time and we are not sure if those triggers will be in UCO or in SCO.  Past results are no guarantee of future results.