They expect OPEC production cuts to hold, driving oil prices much higher still. I’m seeing Wall Street analysts trip over themselves to raise their upside price targets … $60 a barrel … $80 … but don’t believe it, because they’re all dead wrong. And here’s why:
First and foremost, one of the most valuable lessons my friend and colleague Larry Edelson ever taught me about investing was to never, ever take things at face value. Always approach markets with a healthy dose of skepticism. That’s why, just like Larry, I’ve always considered myself a true contrarian investor at heart.
I just love to find crowded markets, where everyone is positioned on one side or the other – I just naturally look to take the other side of that trade.
Show me a market with record-high short interest – where bearish sentiment is so thick you can cut it with a knife – and I’m looking for a bottom to go long. The more hated the investment, the more appealing it is to me.
And when I find a market that’s overflowing with bullish sentiment, where everyone – including my 86-year-old mother can’t wait to buy – then I’m looking to sell short … that is, right after I try and talk my mom out of buying.
Sure enough, crude oil is crowded with bulls right now, and it’s amazing how quickly sentiment turned so bullish. Just a few weeks ago, crude was trading several bucks below $50 a barrel.
Back then, Wall Street naysayers expected $35-a-barrel oil, or even lower. I said, baloney. And told paid members of E-Wave Trader (formerly SuperCycle Trader) to load up for the next rally in oil.
What a difference a few weeks can make! Now, with oil approaching the mid-$50s again, crude doesn’t look nearly as attractive to me. Plus, our E-Wave cycle analysis tells me oil is just a few weeks away from rolling over again, trending lower in May, for two key reasons:
Reason #1 – Supply is quickly ramping up: First, U.S. drillers are boosting output as oil prices rise. And they’re increasing production much faster than the market expected.
The latest drilling-rig data from Baker Hughes confirms this: The U.S. rig count climbed to 683 last week. That’s the highest since April 2015 and a 13th straight week of gains.
In fact, the number of working rigs has more than doubled since last year’s low.
State-of-the-art drilling technology, built in the USA, is able to bring production online much faster than ever before, allowing small, domestic explorers to quickly respond to higher oil prices.
Reason #2 – Sentiment is way too bullish: Bloomberg reported just yesterday that hedge funds boosted their bullish wagers on oil futures big time. Net-long positions jumped by 42,199 futures contracts, and options bets soared to 309,229, according to data from the Commodity Futures Trading Commission (CFTC). You can see it all in the chart above.
Meanwhile, short-interest in oil futures – the so-called “smart money” betting on a decline in price – plunged by more than 30% last week alone. The biggest drop this year!
Talk about a market that is crowded with bulls! And the last time hedge funds were so bullish was in February… just before oil tumbled almost 15% in a matter of weeks … proving once again that the “smart money” acts pretty dumb at key market turning points!
Bottom line: Don’t believe the hype about higher oil prices. While crude could move a tad higher over the next few weeks, I expect oil to stay range bound for some time. And mark my words, the next move coming soon is back down to the low end of that range.
The ProShares Ultra DJ-UBS Crude Oil (NYSE:UCO) fell $0.11 (-0.54%) in premarket trading Wednesday. Year-to-date, UCO has declined -12.20%, versus a 4.63% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Money And Markets.