Thursday, January 7, 2016

Oil Prices - Two Important Charts

Oil is going down, down, down. Yes, that's right. When any financial instrument goes down or up over an extended period the analysts start making predictions.

As my readers know, I am very far from making any predictions. However, why not to look at something and try to find some factors supporting an investment thesis. Today let  me look at oil prices.

Firstly, a long-term view:

The chart shows net positions in futures contracts on oil (crude oil light sweet NYMEX) held by big speculators. It is really a strange situation. Despite the fact that oil prices are currently at their multi-year lows, speculators still hold quite large net long positions (196.3 thousand contracts)- there is no pessimism at all! In the long-term, the downward trend in oil prices should continue because the relevant reversals occur only when there is remarkable pessimism.

Now, the short-term perspective:

The chart shows short positions held by the managed-money. Currently these speculators hold very large short positions in oil futures. Usually, such a pattern means that a short term bounce is coming - simply put, there is too much short-term pessimism.

Summarizing - the downward long-term trend in oil prices seems to be secure but in  the short term the market demonstrates a chance for a bounce.

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