Traders Are Well Advised To Short Oil On Its Next Bounce (SCO)

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June 3, 2017 6:01am NYSE:SCO

NYSE:SCO | News, Ratings, and Charts

From Mike Burnick: Last week, OPEC and non-OPEC producers agreed to extend oil-production cuts for another nine months. These cuts amount to 1.8 million barrels per day from late 2016 levels.


Are those significant cuts? Not really. They amount to about 2% of global production. Plus, they’re a drop in the bucket compared to global oil inventories, which are 350 million barrels above their five-year average.

That’s why I’m not one bit surprised. that Goldman Sachs, Societe Generale and JP Morgan downwardly revised their 2017 oil-price outlooks.

The fact is investors want a larger commitment to tighten the global supply-and-demand balance. But because the cartel needs money, their hands are tied. And the way I see it, their desperation to maintain oil revenues will send oil prices lower, not higher.

Plus, there are three bearish headwinds bearing down on the oil market in the coming months …

Bearish Headwind #1: Surging U.S. oil supplies.

Experts expect U.S. shale-oil production to increase by 900,000 barrels-per-day this year. And the U.S. Energy Information Administration (EIA) upwardly revised their U.S. oil-production forecast for 2017 and 2018.

This view is supported by the surge in U.S. oil-rig activity compiled by Baker Hughes, which has increased for 19 consecutive weeks to the highest level since April 2015. And pumping more oil than the market can bear means lower prices in the months ahead.

Bearish Headwind #2: Demand.

Demand is becoming a larger determinant for oil prices, especially as supply-side dynamics are widely accepted and priced-in by the market. And one trouble spot I see is the slow start to the peak U.S. summer driving season, with gasoline demand continuing to run below year-ago levels.

The other demand concern is questionable Chinese economic-growth prospects and uncertain credit-market conditions. Plus, China is reducing oil purchases.

This comes as the Red Dragon’s refiners contend with too much supply, insufficient storage facilities and soft local demand, all of which will likely slow Chinese oil imports in the coming months.

Bearish Headwind #3: Bearish E-Wave forecast.

I talked about the E-Wave oil forecast a couple of weeks ago, and it’s playing out right on cue. Take a look:

After bottoming out in early May, oil prices rallied sharply into the OPEC meeting decision. And the evidence points to one last thrust higher before a sharp downturn into late July.

So, how do you play the oil market in the near term?

While the post-OPEC meeting response was negative, I still anticipate a short-term thrust higher back above the $51.00 level.

This is the rally to sell into. I have my sights on the ProShares UltraShort Bloomberg Crude Oil ETF (SCO) as the perfect vehicle to profit from the unfolding slide.

But just like in all investing, timing is everything! It’s not enough to know what to buy or sell. You have to know when to do it as well.

The ProShares UltraShort Bloomberg Crude Oil ETF (NYSE:SCO) closed at $40.74 on Friday, up $0.38 (+0.94%). Year-to-date, SCO has gained 28.72%, versus a 9.23% rise in the benchmark S&P 500 index during the same period.

SCO currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #5 of 31 ETFs in the Inverse Commodities ETFs category.


This article is brought to you courtesy of The Edelson Institute.


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