As I write this, crude oil inventories were just released, and in a heartbeat, the oil selling has returned with a vengeance. What is especially interesting is how much the price of crude oil is driving the rest of the financial markets. With this sell off, equities have followed oil lower and bonds have pushed to new highs for the day. Like it or not, we are all oil traders now…
Although the volatility is scary and there does not appear to be any end to the selling, be careful not to look too closely at each tick. Step back and think about the big picture.
Charlie Biello published this great tweet that puts things into perspective:
Maybe we go lower. We have definitely hit the panic portion of the move where the pain is intense and there is vomit all over the trading room floor. But I agree with Harold Hamm’s (CEO of Continental Resources) comment this morning on Bloomberg TV:
“The lower it goes, the shorter the time it will be there.”
A face ripping rally is lurking within these wild gyrations. The key is trading with the right position size so that you are there to participate when the inevitable rally comes…
Just to keep you thinking about the longer term picture, I will leave you with two charts. The first one shows the relationship between crude oil and the US dollar index.
Anyone who doesn’t think the massive US dollar rally hasn’t been one of the driving factors of this crude oil plunge should examine the remarkable correlation between these two assets.
And the second chart shows the performance of the US dollar index in the months following the first rate tightening.
During the past 30 years, the US dollar has never rallied more than 3% in the two months after the first rate hike. In fact, in three cases the US dollar retreated a fair bit during this period.
Although the fundamentals all seem to point towards lower oil prices, at this point we have gone past a fully “baked in” situation. Prices are trading on emotion, not reason. I continue to stay long crude oil praying I have bought enough to make a difference, but not so much that I get spooked out of my position…
Thanks for reading,