Oil prices have been moving like a yoyo lately – up and down within a given range, seemingly without reason.
By the time the oil market closed at 2:30 p.m. Eastern, West Texas Intermediate (WTI, the NYMEX benchmark rate for futures contracts) had shot up 5.2% for the day. Dated Brent, the other (and more used) global benchmark set in London had increased 4.5% for the day.
But that came after a drop of 2.9% and 2.5%, respectively, over the weekend. And both benchmarks remain about 50% down since mid-November of 2014.
Now, the immediate cause of this latest rally was short covering, which should peter out today. That means the yoyo is set to continue.
But behind the scenes, the pieces are getting in place for oil prices to move up to $42-$45 per barrel – soon.
And that will give you plenty of opportunities…
Why the Oil “Yoyo” Will Swing Back Up Again
The current rise in prices results from two very different causes. The first is another misread of the market.
You see, each week, a number of pundits are surveyed to provide an estimate of how much oil has been produced. This survey projected a further rise, but the market instead provided a rather significant drawdown from surpluses available.
This should come as no surprise, as these alleged “experts” are wrong about 70% of the time. But even so, oil traders must remain very sensitive to the balance of supply and demand when determining strike prices for futures contracts.
Simply put, these guys cannot chance carrying barrels priced much higher or lower than the market dictates.
Second, a meeting on April 17 between OPEC producers on the one hand and Russia on the other now seems likely. This gathering will discuss a production cap (not a cut) that would use the production totals from January as the basis.
There are several matters to keep in mind when it comes to this meeting…
Even Russia is Onboard with the Production Cap
January was one of the highest global monthly production totals on record. So anybody signing on to the cap is not really giving up anything. A number of producers just about reached their maximum levels anyway by the time the money was coming to a close.
