While the S&P 500 has rallied 8.9 percent in 2017, oil and energy investors have been left in the dust. The Energy Select Sector SPDR (ETF) XLE 0.16% is down 13.3 percent and the United States Oil Fund LP (ETF) USO 2.26% is down 16.8 percent on the year as WTI crude oil prices have once again dipped below $48/bbl.
After rallying in the weeks following a historic OPEC production cut deal in November, oil prices have slumped again in 2017 as it appears the OPEC cuts aren’t doing as good a job as anticipated at alleviating the massive global supply glut that led to a crash in oil prices in 2014.
WTI prices drifted mostly sideways in the opening months of the year before crashing below the $50 mark in recent weeks as OPEC opted not to announce even deeper cuts for the rest of the year.
Things are certainly looking down for oil investors, but Fundstrat analyst Thomas Lee sees one bullish indicator in the oil market that suggests WTI could be headed above $60/bbl in the near future.
A Contrarian Indicator
In an appearance on CNBC, Lee pointed out that oil futures contracts are on the brink of transitioning into backwardation. Futures contracts typically trade at higher prices the further the expiration date is into the future. However, backwardation is a scenario in which futures contracts that expire at later dates are trading at lower prices than those expiring sooner.
“We’re approaching a flip into backwardation meaning the spot price is approaching and may soon exceed the 24-month contract,” Lee said.
While this situation may seem bearish for oil investors, Lee said it has historically been a contrarian buy indicator.
“Our investors and clients are overly pessimistic on oil. The market is coming into balance,” he said.
History As A Guide
What could it mean for oil prices if Lee’s contrarian thesis comes true? The last four times the oil futures market slipped into backwardation oil prices rallied…
Click here to continue reading
Want to learn more about how to profit off the stock market? Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!
