From $61 to $55? Why I’m Short Oil, But Staying Flexible

The price of oil has dropped over 25% since US President Donald Trump announced plans to produce more oil. But is this narrative still in play? Or is the bearish trend coming to an end?

To add a quick caveat to this analysis, I am currently short from $61.10 with a target of $55.00. But as more information comes to light, I may reconsider this position.

First, why did I get short in the first place?

From a macro/fundamental view, the price of oil has been impacted by several factors. These include:

1. Trump vs China Trade War: This is the biggie, markets sold oil aggressively after Liberation Day in fear of global uncertainty and an economic slowdown. If the trade war escalates then the demand for oil could decline as consumers may change their spending habits due to inflation worries coming from the tariffs. We have seen this within the US data, consumer sentiment surveys suggest that everyday people expect to see inflation rise to 5-6% by the end of the year. That means they will be less inclined to spend, and upcoming retail sales tomorrow will be watched with eagle eyes. A decline here could compound the oil weakness we are seeing.

2. OPEC's unwillingness to cut production, in fact, two days after Liberation Day, OPEC announced there would be increased production, which further compounded the weakness, seeing oil prices fall from $67.00 down to $57.00.

3. Hedge fund positioning was weighted heavily toward selling oil, even though contracts have reached an extreme.

On a technical basis, the price remains in a strong downward trend, staying below the key resistance of $63.00. The price is also trading below the 50-day moving average, which tells us that the sellers are in control of this market currently. Until this changes, then the price from a technical point of view is still bearish.

But that doesn't mean it will stay that way.

Now there are some of the factors I mentioned above that could also mean the oil prices could rally.

One of those is the China vs US trade war. What if the market overreacted to the news, and thought, let's dump oil prices in anticipation of a long slogged-out trade war? Makes sense. But on April 9th, US President Trump announced a 90-day pause on tariffs, even exempting some items. This saw the price of oil rally from the low of $55.16 to the high of $62.80. We have to ask ourselves, if this begins to de-escalate then the oil demand may rise.

Another factor for me is the commercial and non-commercial positioning from the recent CFTC report. Commercial entities that are in the futures market to hedge risk and price fluctuations are buying at levels we haven't seen since June 2012. In that situation, the price of oil rose from $80.00 to $110.00. They are buying at record levels because the price is at its lowest level since 2021.

From the non-commercial standpoint, the large speculators who are in the markets to make money, have built up their largest short position since the same time in 2012.

Whenever I see this I become more cautious. Why? Because when we reach extremes in the reports, we can often see reversals form. It may be because of supply and demand changes, or because positions are so short they have to liquidate to free up risk. In this case, they would buy back their short positions, which could lead to higher prices.

Let's think about why hedge funds have been selling. Is it because we have actual data to suggest the US economy is in a terrible state, or is it because of potential risks ahead?

If it is potential risks ahead, then unless the data begins to back up real US economic struggles, then we are likely to see oil prices rebound in the short term.

Some key points I am watching in the near future in terms of data:

• US retail sales this week, if this shows that consumers are not spending and coming in lower than expectations then we could see fear re-ignite in the market, fear will bring oil prices lower. A release in line with or beating forecasts could be positive oil.

• Attention will begin to turn to employment again, this is the real hard data that we need to see weaken if there is a solid case for US weakness. If we see the unemployment rate rise above 5% then this suggests some economic downside is coming.

• GDP forecasts are also in the spotlight, this is where the focus remains, more so than inflation right now. If the forecasts show weaker growth then demand for oil falls.

• If OPEC and non-OPEC countries reduce production then less oil is in the system and this naturally drives up demand.

My stop loss is the perfect place for a change in sentiment for me, it's why I put it there. If the price breaks through my stop loss above $65.00 then the market wants to move higher and we would likely see a move up to $67.00. From there we could either see the narrative unchanged and the trend continues down, or the price could break through on a positive trade war outcome.

Either way, the markets will tell us what's going on. Good luck out there traders!