The current rise in oil prices is more of a fear trade right now, driven by fear of what is going on in the Middle East, rather than a result of growing OPEC chatter or inventory reports, Todd Horwitz, chief strategist at Bubbatrading.com, told Bloomberg on Wednesday.
“The oil premiums are very narrow going out to the future, which means that this is more of a fear trade in the front month,” Horwitz said on ‘Bloomberg Markets’.
“To me, this is more of just another farce of what OPEC is trying to do, and trying to push these prices higher,” the strategist noted.
OPEC and its non-OPEC partners in the production cut deal are scheduled to meet in Vienna on November 30 to discuss the extension of their pact.
While just a month ago a nine-month extension to the end of 2018 was the base case of all analysts, now there are growing voices that OPEC may delay the decision to early next year. The constant OPEC chatter and the return of some geopolitical risk premium in oil prices - with Saudi Arabia’s purge, heightened Saudi-Iran tensions, and the Iraq-Kurdistan standoff - have pushed oil prices to their highest in two years over the past few weeks.
According to Horwitz, however, the WTI price has little room to rise from its current price of around $58 per barrel, because U.S. shale will return stronger.
There’s a better chance that WTI prices will drop to the low $40s than they rise to the low $60s, Horwitz said.
“I would think that the rigs will be back in the fields and the shale producers will be pumping it out like crazy at these levels,” Horwitz said.
On Wednesday, Baker Hughes said that the number of oil and gas rigs in the United States rose again this week.
The boost in the number of active oil rigs this week brings the total gained in November to 10—the first monthly gain since July. Oil and gas rigs combined were up by 14 in November—also the biggest increase seen since July, in a sign that drillers are once again eager to add rigs after scaling back in August.
Additionally, from a technical perspective, Bloomberg notes that the rally in U.S. West Texas Intermediate crude may be losing steam.
Front-month futures are nearing the upper limit of the Bollinger Band, a sign that they are approaching overbought territory. Stochastics, an indicator of momentum, and the relative strength index also show the advance has probably gone too far. WTI’s gain is being driven by concern that an outage in the Keystone pipeline will disrupt flows from Canada and tighten supplies at the storage hub in Cushing, Oklahoma.