Oil prices have been crushed over the last 18 months. From its high in June of 2014, the benchmark U.S. oil price is down 74%. Over the long-run prices follow fundamentals, but in the short-term, psychology and sentiment can play the dominant role. We may be seeing that today.
Where is the sentiment on oil now? I don’t have to tell you that it is dismal. Just pick up a newspaper. All I see are calls for lower prices for longer and that oil is going to $10 or $15 per barrel. That wasn’t the case at this time last year. The market was still expecting a quick recovery to $60-$70 oil. When it became clear a quick recovery wasn’t happening, we saw another leg down in prices last summer, but as the recent price action in oil proves, there were apparently still too many bulls.
This last leg down has many investors throwing in the towel. Short-interest in oil has soared. That’s probably a sign that capitulation is starting which often sets the stage for recovery. In real terms, oil still hasn’t hit historic lows, but at $28 per barrel, it is now trading below its long-term average. Could oil go to $15? Of course it could, but that would set a post-WWII low in inflation-adjusted terms.
