Start the conversation
Editor's Note: Tapping into the energy sector's true profit potential means digging beyond the headlines. In Oil & Energy Investor, Dr. Kent Moors reveals what's happening behind the scenes and how the industry's biggest players are enriching themselves, so you can profit from their moves. Click here to get Kent's expert analysis and recommendations yourself. It's completely free.
When oil trading ended at 2:30 p.m. Eastern last Wednesday, the West Texas Intermediate (WTI) had moved up 2.4%.
Brent, the other and more globally used benchmark, had risen 2.7%.
Both reversed a downturn that has enveloped the oil trade since the end of last month.
You see, after reaching multiyear highs on Jan. 26, WTI had declined 10.5% through Feb. 13, while Brent slid 11.3%.
Moreover, as the markets begin to show signs of finding a bottom – with four consecutive positive sessions through yesterday's close – the energy sector has continued to perform weaker than most of the other S&P 500 sectors.
Because of that, analysts have started grasping at straws.
Some are predicting a gradual lowering of prices from current levels…
While others are taking their cues from more immediate production figures, supply levels, and demand estimates.
Fact is, volatility has taken hold of the global oil markets.
After a seven-month period of remarkably low volatility in oil, the last few weeks have been turbulent.
And that has a lot of oil enthusiasts nervous.
However, all of this needs to be put into perspective to understand what's really at work here.
And that's exactly what we're going to do today…
Oil's "Chicken Littles"
Oil's meteoric rise over the past year has been extraordinary.
In fact, WTI alone climbed 42.1% from June 21 through Dec. 29.
We had already surpassed my second-quarter pricing predictions for both WTI and Brent… before January was even over.
Normally, at this point, I would comment on the overuse of short positions to profit from pushing oil down.
This has been the normal sequence in the past.
As soon as oil would show some weakness, "Chicken Littles" would populate the airwaves and proclaim the "sky is falling" (i.e., oil going down to less than $40 a barrel) and then, to the extent investors bought it, run all the way to the bank.
The Saudis have invested $100 billion into one type of fuel, and I'm not talking about oil. This universal fuel is slated for a global takeover. Here's how you can take part…
A short play profits when an expected decline occurs.
A player borrows a position from a broker and then immediately sells it in the market.
Later, by or before a contracted time, they then go back into the market, buying back whatever the short was based upon, and return it to the original lender.
If the assumption proves correct, a profit is made on a declining underlying asset.
For example, an investor believes XYZ stock will decline.
It is currently trading at $10; it's borrowed and immediately sold at market.
Later the stock goes down to $8, the short player enters back into the market, buys back the share, returns it to the original lending broker, and pockets a $2 profit.
Shorts, however, remain quite risky.
If you are wrong and the underlying asset increases in value, there is theoretically no limit to how much can be lost.
Early redemptions of shorts to avoid catastrophic losses will serve to fuel a further spike in price.
OK, absent a major drop in global demand and/or an unexpected (and prolonged) rise in excess supply, it is the yo-yoing of the market via shorts that usually provides the rationale for prices moving south.
Some shorting is inevitable, given the demand/supply dynamic in an environment in which every pundit knows there is plenty of extractable volume available for ready dumping on the market.
The problem at this point, however, is twofold.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.