Oil prices give investors costly head fake

Oil prices give investors costly head fake

Oil prices give investors costly head fake Advisors who took the three-day jump in oil prices as a sign they should start buying energy stocks for their clients might want to reconsider because new evidence suggests the surge was nothing but a false positive.

“Citi foresees that WTI and Brent prices should post another fresh leg lower—perhaps making new 2015 lows—before year-end," Citigroup’s global head of commodities research, Edward Morse wrote in a note to clients Tuesday. "Sharp gains over the past three trading sessions were driven by a combination of short covering and chart-readers again looking to call a bottom falsely."

Morse believes factors investors are pointing to as evidence the good times lie ahead such as the new numbers out of the Energy Information Agency showing U.S. shale production is down, slower Saudi production and the possibility that OPEC is willing to work with other oil producers to manage production are all to be taken with a huge grain of salt.

Both the EIA and the American Petroleum Institute delivered data Tuesday that showed crude oil inventories in the U.S. are way up, debunking any thoughts of a shortage. Prices dropped dramatically on the news.

"2015 is not like 1998 when both Mexican and Russian production were surging and when both countries participated in a supply cut," said Morse. "Russian production is growing this year because of a significantly weaker ruble cost of oil while Mexico is trying to push through energy reform."

How low could WTI crude go?

“I wouldn’t be surprised if WTI drops below $30 later this year before rebounding,” Morse told an oil conference in New York last week. “Non-OPEC production is just not showing declines. There’s been no real rollover except in Mexico.”

If it does drop into the $20s by the end of the year we’re talking about a 30% decline from where they sit today. That would be one expensive head fake.