The oil price explosion is totally detached from reality
Oil prices are still massively higher than they were a week ago but Citi believes that the surge is pretty much devoid from reality.
Crude oil rocketed nearly 30% in just three days, its biggest three-day rally in 25 years. Since Friday August 28, oil over 20% higher.
Today, crude oil prices are initially ebbing off ever-so slightly. But while crude oil is hovering around $47.86, the chart shows the undeniable explosion in prices over the last few days.
However, the spike isn't good news, considering oil prices are still around 50% lower than they were at their peak in the summer of 2014.
Edward L Morse and his team at Citi, in a note entitled "The Oil Price Surge" sent to investors this morning, say that the markets may be in for a nasty shock as people are not trading on "facts" (emphasis ours):
The bullish c20-25% crude oil price spike since late last week looks driven more by sentiment than by reality.
Bottom Line: Citi foresees that WTI and Brent prices should post another fresh leg lower-perhaps making new 2015 lows-before year-end.
In Citi's view, it's time to "sell the news and buy the facts." This is reinforced by today's strong intra-day gains around 8%, which appear driven by a misread of market data and financial headlines. Notably, nearby timespreads are lagging the move higher in flat price, which is consistent with weak fundamentals.
Sharp gains over the past three trading sessions were driven by a combination of short covering and chart-readers again looking to call a bottom falsely.
So what are the "facts" that Citi talks about?
Morse and his team laid out a lengthy list of reasons but one of the key issues is that how investors may be "misreading" data.
For example, Citi highlights how the US' Energy Information Administration's data "should be treated with caution." It also added that there was a rounding error in Saudi Arabia's barrels per day production numbers which makes it look like they are cutting production when in fact they aren't, says Citi.