Oil Is Too Expensive

Is it time to sell oil? Is the recent rise too bubbly? Can it rise even more? Well, it can rise more, but it is too frothy at the current moment. 

Last week, West Texas Intermediate ("WTI") crude – the U.S. benchmark for prices – passed $63 for the first time since Porter issued +his warning in 2014.

The latest highs followed news that U.S. oil inventories fell for the eighth straight week. They now sit at their lowest level since August 2015.

While this suggests that OPEC's plan to reduce the global glut has been working better than expected, there are now signs that it may have gone too far.

Most important, at current prices, almost all U.S. shale producers can earn a profit...

So we'd expect to see both production and "hedging" to lock in higher prices begin to ramp back up. And that's exactly what has happened...

The oil "rig count" – the number of rigs actively drilling for oil in the U.S. – has been rising again. U.S. firms added 10 oil rigs last week, for a total of 752 active rigs, according to oil-services provider Baker Hughes. That's the biggest weekly increase since last June.

Meanwhile, news service Reuters notes that U.S. shale firms added more than 144 million barrels of oil to their hedges over the last quarter. According to the U.S. Energy Information Administration, this all but guarantees total U.S. production will rise to a new all-time record of more than 10 million barrels per day this year.

But that's not the only reason for concern...

Today, traders are incredibly bullish on oil again.

Regular Digest readers are familiar with the Commitments of Traders ("COT") report. This report is published weekly by the U.S. Commodity Futures Trading Commission, and shows the real-money bets of futures traders across dozens of asset markets.

And according to the latest COT report, speculative traders are now more bullish on crude oil than ever before in history.

As we often say, if there's one constant in the financial markets, it's this: Popular investment ideas are usually losers. Whenever the "crowd" is heavily betting one way, it's often a good time to take the other side of that bet.

In short, we now have similar conditions to those that led to the last plunge in crude...

In its quest to stabilize the market, OPEC has thrown a lifeline to even the most troubled U.S. shale firms. They can now ramp up production again – thanks to hedging – continue to produce even if prices begin to fall.

Meanwhile, speculative traders have gone "all in" on oil, and will likely rush for the exits at the first sign of trouble.

It's a near-perfect recipe for lower prices.