Changing My Timeline on the Next Oil Boom

 | Jun 26, 2017 | 2:00 PM EDT
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There hasn't been much to hang your hat on in the oil markets recently. What has seemed to be good news has turned out bad, as the production cuts from OPEC extending into mid-2018 turned out to be an opportunity not to buy oil and oil stocks, but to sell them.

Meanwhile, one trend has continued to be bankable -- and that's the ability of short-term speculative oil investors to get the trend wrong.

I don't say that merely tongue-in-cheek -- I was one of the traders who thought that oil would be acting in a far more constructive way right now, instead of wondering whether prices would again breach $40 on the downside. And despite the fact that my long-term thesis on oil is unchanged --and must inevitably lead to higher prices and soaring oil stocks -- it is now clear that the timeline for that next boom cycle has been put farther and farther along, perhaps into 2018. 

Still, oil traders keep getting the cycle wrong. Have a look here at the three mini-busts in oil we've seen since the lows were struck in early 2016.

On three occasions, we've seen fast drops in oil's price: in July/August of 2016, November of 2016 and now in June of 2017. Now take a look at speculative positions for each of those time periods:

This is a collective mapping of speculative positions over the last several years. If you map the long positions with the price of oil for those three mini-busts, you'll see a direct correlation.

Now look here:

You'll see that today we have one of the most-bearish positionings in speculative shorts we've seen in the last several years, and the most bearish for 2017 yet. That's normally led to a short-covering rally that's been pretty significant, just as the major low in this last chart, seen in November of 2016, led to the rally that saw prices move from $43 to $54 dollars a barrel. 

I'm adjusting my timing for the next oil boom further down the timeline, and now I believe that any short-term rally in oil is likely to make for another financial cycle like we've seen in these last three mini-busts. But that doesn't mean that there isn't opportunity brewing in this change of heart from oil traders. 

They've proven how wrong they can be in short-cycle bets on the price of oil. I'm now expecting a major rally in oil back towards $50 -- a rally that likely needs to be sold, but a strong rally nonetheless.

If you've been sticking with oil stocks through this OPEC disaster, now might be a good opportunity to add to those positions, look for a short-covering rally and find a better basis price for lightening up at higher levels.

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