Having been blown out of his momentum-chasing stock positions so many times in the past few months it made our readers' heads spin, this morning "world-renowned commodity guru" Dennis Gartman has decided to turn his attention to a new asset class. Oil.
The reason for this is that Gartman is confident he has spotted something which will, or at least should, send the price of oil sharply lower. He explains:
CRUDE OIL PRICES ARE ONLY SLIGHTLY WEAKER THIS MORNING when compared to the levels marked here yesterday; however, after we had written and had sent TGL to our clients around the world yesterday crude rose rather sharply and then collapsed, forging a “reversal” to the downside in the process and very much capturing our attention as evidenced by the chart the page following of nearby Brent crude. The chart of nearby WTI obviously looks identical and because we always at minimum “respect” reversals and often trade them we are drawing very clear attention to what has happened here. This is material and we would be remiss in not noting so.
Further, the term structures have moved decisively and materially in a bearish manner as the backwardations in Brent and WTI have imploded in the course of the past twenty-four hours. Yesterday, on our mark, the averaged one-year front month backwardation for Brent and WTI had gotten to $6.50/barrel; this morning that has narrowed to $5.70/barrel and although that may not be a record narrowing in one trading session, certainly it is material. It is still wider than where it was one week ago when it stood at $4.67 and so crude is still being bid out of storage rather than bidding for storage, but the fact that it has narrowed 80 cents/barrel clearly has our attention… especially in light of the “reversal” noted above.
If we must point to a “fundamental” reason for the sharp downward movement we can and we will blame it upon the fact that there are simply a very large number of DUCs out there; that is, there are hundreds of wells drilled but uncompleted in the Permian primarily, but in the Bakken and the Eagle Ford too, that can and will be brought on line with prices at their current levels. The E&P “boys” would prefer a futures market in contango into which to hedge but a narrowing backwardation after the recent sharp rally is enticing… and will be.
In theory, there is nothing wrong with Gartman's argument, which IEA executive director Fatih Birol echoed earlier today when he said that not only would higher oil prices weaken global oil-demand growth, and spark increased output from non-OPEC, but if current prices stick or increase, the coming wave of shale production may be bigger than expected.
Which brings us to Gartman's actual trade reco:
NEW RECOMMENDATION: We wish to sell WTI and Brent Crude short this morning upon receipt of this commentary, predicated upon the massive narrowing of the backwardation in both and predicated of course upon the “reversals” suffered by both. We’ll have stops in tomorrow’s TGL, but for now we’ll risk $1.20/barrel from the current level, looking for $5-$7/barrel to the downside and one unit of each shall suffice
And while we said there is nothing wrong with Gartman's logic "in theory", in practice... things may turn ugly for oil bears.
For now oil is up only 22 cents, meaning those who hurry can make a quick buck as Gartman is stopped out in the next day or two.