The oil drop that didn’t happen

Oil Pemex Mexico

Susana Gonzalez | Bloomberg | Getty Images

Well, this wasn’t supposed to happen. Oil was supposed to be down big if there was no Doha agreement, right?

Except it’s not. Oil is closing in the regular session down only 1.5% And instead of a selloff in energy stocks, they are leading a modest market rally.

What happened? Blame it on the so-called “smart money,” which appears to be wrong again. The smart money bet — correctly — that there would not be any agreement in Doha.

But then a funny thing happened. Oil dropped in early trading but quickly started turning around.

The low print in oil was at the 9:30 a.m. market open, but if you look at oil-related ETFs like USO you can see volume really picked up immediately after that and then again after 11 a.m., when oil started climbing above its earlier lows.

In other words, it looked an awful lot like the smart money was short oil into the Doha meeting. When there was no real selloff, the shorts covered quickly.

And you can see this in energy stocks, which are leading the market to the upside.

What happened? Everyone keeps talking about the strike in Kuwait, and there may be something to this, depending on how long the strike lasts. Kuwait produces about 2.8 million barrels a day, and if half of that could go offline, that’s significant.

Also, the market doesn’t seem to believe that oil will degenerate into “everyone for themselves” or that this threat is a paper tiger. Maybe countries like Saudi Arabia and Russia are already at peak production, so they can’t really bring more crude on line?

But there seems to be something else going on: there’s a broad market uptrend still unfolding. The advance/decline line is still in an uptrend. We have not had significant breakouts in indices, nor in the New High list, but the trend seems to be up.

Much of this bullish talk is based on the hope that earnings for the broader market — particularly global Industrials — will be a little better than expected, just as they were for big banks last week.

There’s early talk that the Q1 2016 earnings season — four consecutive quarters of declines — may be the bottom of the profits recession. Is there much to support that claim? No. But that’s the whisper trade.

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