West Texas Intermediate crude oil surged to $54.24 today, 22 percent higher than it closed just four sessions ago on January 29th. But before we start worrying about $4 gas again remember that the price of a barrel of WTI is still down 52 percent from its last summer high of $107.73.
Two factors have contributed to its spectacular if brief run:
Market Positioning--the seven and a half month fall in crude left a market severely short and ready to take profit. Most contracts are not held for deliverly but are trading positions. WTI had traded below $45 just six times this year but it went there every day last week. After five attempts to break lower, Friday's almost 10 percent break higher was the reverse signal any cautious profit takers might have needed and they have followed suit yesterday and today.
Supply Contraction--U..S. drillers idled 94 rigs last week, the greatest number in data going back to 1987. In the past two months 352 rigs have left production or exploration. BP announced it will spend $20 billin this year instead of its previous $26 billion.
Fewer rigs and less investment means less oil on the market, eventually. Scarcer supply means higher prices, again eventually. But as motivation for a profoundly short market to take profit there is no such time as eventually, there is only now.
Chief Market Strategist
WorldWideMarket Online Trading