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Trader: "The Bigger Picture On Oil Is Far More Negative"

• http://www.zerohedge.com

With oil prices spiking nearly 10% from last Friday's sudden, capitulation "flash crash" which was perhaps driven by Pierre Andurand liquidating his entire long book, there has been a scramble by analysts to "fit" the narrative to the price action and the sudden change in momentum, most notably by Goldman, which continues to pump one after another bullish crude note, we suppose because Goldman's prop trading desk still has some oil left to sell to clients. However, is the recent bounce an indication of a sustainable direction shift, facilitated by a another even more acute round of OPEC jawboning even as shale production continues to grow, or just a dead cat bounce?

According to Bloomberg FX commentator Mark Cudmore, the answer is the latter as he explains in his latest overnight "macro view" note.

Traders' New Love for Oil Isn't Basis for Marriage: Macro View

What a difference a week makes. Oil prices are more than 9% above last Friday's capitulation low. The bounce has legs in the short-term but it doesn't alter the long-term bearish story. 

Recent newsflow justifies this rally. U.S. oil inventories just showed their largest drop of 2017, and a fifth consecutive weekly decline. OPEC is expected to extend production cuts when it meets May 25. Goldman reiterated its bullish call for an imminent supply deficit.

February's record speculative long position has been roughly halved. The market technicals appear healthy and fresh for a sustained bounce.

That's the short-term outlook. But at some point the much bigger picture will dominate again and that entails a far more negative skew on the situation.

As Bloomberg oil strategist Julian Lee wrote, the OPEC production cuts would need to be significantly deepened to remove the OECD stockpile by year-end -- especially in the face of increased output from Libya and Nigeria.

OPEC itself just raised its forecast for 2017 production from non-members by 64%. U.S. Baker Hughes rig count has climbed for the past 16 weeks.

U.S. stockpiles may now be showing a steady decline – but only from an extreme record. They are still above any level seen before this year.

The important backdrop is that extraction from shale continues to become cheaper and more efficient all the time, lowering the price point above which production will rapidly increase to flood the market with supply.


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