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How 91 Percent of Oil Traders Missed the Trend

Lopsided sentiment often anticipates market turns

by Bob Stokes
Updated: December 22, 2014

[Editor's note: Below is the text version of the video.]

Crude oil's decline has been astonishingly rapid. In the past six months, prices have fallen by nearly 50%. 

Let's put that decline in perspective:

The sharp plunge in crude prices has resulted in a faster, steeper drop in shares of oil exploration-and-production stocks than even the dot-com stocks experienced back in early 2000 when the Internet-stock bubble burst. The oil stock drop is also worse than the initial sell-off in home builder stocks following their peak in July 2005 when the real estate boom started to go bust.

USA Today, December 16

On December 22, prices continued to drop. With crude near $56 a barrel, many observers now blame oversupply.

The world's biggest oil companies faced ruin in the summer of 1931. Crude prices had plummeted. Wildcatters were selling oil from the bonanza East Texas field for a nickel a barrel, cheaper than a bowl of chili. .... The descendants of the 1930s wildcatters are today's producers of oil from shale, who are driving down the world price of crude by flooding the market with millions of barrels of new oil each day.

Bloomberg Businessweek, December 11

But the U.S. ramped up its oil production before the crude oil trend began its dramatic decline. This New York Times headline published on January 24, 2014:

U.S. Oil Production Keeps Rising Beyond the Forecasts

Even so, in March, 91% of Large Speculators in crude oil were bullish.

In crude oil futures there is not only an all-time record net long position among Large Specs but also an all-time record net short position among Commercials, who have a history of being mostly on the right side of the markets they trade. Markets cannot stand such a high level of optimism among commodity investors (and pessimism among commodity users) for long.

The Elliott Wave Theorist, May 2014

We've learned that lopsided sentiment often anticipates major market turns.

Crude oil's trend change is a notable case-in-point.

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How 91 Percent of Oil Traders Missed the Trend