Recapping oils bounce: rig reduction of 25%, reduction of capex by every major oil company in the world, a US dollar which had spiked into mid-month, weakened into month end. The Crude Oil (USO, quote) /USD (UUP, quote) correlations are high, very high. Finally positioning was so short and so bearish, yet people remained with their boot on the neck of Brent prices.
Now looking forward ask yourself the following questions: 1) Will U.S. GDP weaken as we go deeper into Q1? 2) Will the fed have to respond to ECBs war on deflation? Or is the recent spike back in oil prices something that will be self-generating and put the Fed back in play and pushing the DXY back onto its front foot? It’s all pretty circular if you ask me so tenuous at best to believe oil can simply hold the 23% rally in 7 days.
I am confident oil will be north of $65/barrel on Brett in 2H 2015. I am also confident that global demand for oil increases the more prices decrease. I am also confident that oil unlike other commodities, does not need China circa 2006. The worlds demand for oil builds on an aggregate base that builds on itself.
Listening to the Marathon Oil (MRO, quote) conference call this morning we are hearing them say gas demand is moving higher as pumps pricing went lower. This is as good of a leading indicator as we have right now.
This will not be a straight V shaped recovery and spot well nor will it be a W but you can invest here and best of breed for the long-haul or you can be a trader and expect Brent (BNO, quote) to hit low 50s again the minute the US dollar wakes up and tests through 95 on the DXY.
Remember: "price is not truth!"