This post will begin with something you’ve heard a million times before: The year to date has seen impressive price moves in commodities and mining stocks. Fantastic! Ok, now we’ll digress onto something a little more original. The moves in commodities such as Gold, Iron Ore and Copper have been tracked at the very least by their miners this year. Major oil stocks have also quietly followed crude’s 80% recovery from its January low in much the same manner. Shares in BP are currently up 10% from the same date. Those in Royal Dutch Shell have managed 33%.

Shares in Exploration & Production company Tullow Oil have soared a staggering 100% from the January lows while sector peer Premier Oil’s stock is currently up a massive 250%! These are not moves to be baulked at, I’m sure you’ll agree! But where next for the oilers? Indeed, where next for the oil price?

After much hype, the OPEC meeting ended yesterday with no agreement on anything except the fact that everything was hunky dory in the oil markets. And that’s fine, because why should it be OPEC’s responsibility to control the oil price artificially, even if it has done that historically? There’s no reason whatsoever. Market forces will always win out in the long term, and indeed it looks like they may have done so. However, the next few weeks will be crucial in working out whether those market forces still have work to do.

What got us here? Hope? That‘s not sustainable. Technicals? They can only explain so much; they act in both directions and are not sustainable. Improved risk appetite stemming from increased economic confidence? That would’ve been a good one before we heard that 120,000 fewer US jobs were created in May than what was forecast.

So we’re left with a choice between 2 unsustainable bullish drivers for the oil price and one very simple unsustainable one. First, markets actually believed all the dross from within OPEC about limiting production. Second, traders simply saw the commodity as being oversold to the point where the barrel would soon be worth more than the oil inside it. Time to buy, right?!  Finally, and very simply, because markets believed all the dross, and because much of the market was short oil at the time, a combination of speculation and short covering brought us to where we are now: $50.

Now we know that OPEC is happy to let the market do its thing as regards oil, and the fact that the fundamentals look fundamentally shaky, it’s worth mentioning that our trading account allows you to go both long and short the market. It’s also worth mentioning that you can get valuable insight such as this direct from us on a daily basis, for nothing. Zip. Sign up here to get your daily stream of market commentary and actionable trade ideas.

Augustin Eden, Analyst, 3 Jun