After rallying nearly 50% this year, crude prices hit a major speed bump this week as the dollar has firmed up and inventories have risen.
Oil prices were “well overpriced” in the $70s and will continue to weaken in the weeks and months ahead, says James Cordier, President of Liberty Trading Group and co-author of The Complete Guide to Option Selling.
Rather than increased demand, the recent rally was based mainly on speculative demand driven by government stimulus packages, Cordier says. Most notably, a flood of liquidity in China found its way into commodities and China’s economy now “looks like a bubble,” he says, joining a growing chorus.
More evidence the rally was not demand driven emerged Wednesday, when the Energy Department said inventories surged by 5.15 million barrels in the week ended July 24, the biggest weekly increase since April and vs. forecasts for a decline if 1.5 million barrels, according to Bloomberg.
In reaction, crude futures were recently down more than 5%, on track for their biggest decline in three months.
Cordier, who made a well-timed call on a coming oil rally here in February, now expects crude to fall $10 to $15 from recent levels. In anticipation of that drop, Liberty is making a bearish trade — “selling calls with both hands,” Cordier says.
If and when that happens, he also predicts prices at the pump will fall 10 to 15 cents from current levels, which would be welcomed news for cash-strapped Americans.
Business Insider Emails & Alerts
Site highlights each day to your inbox.