Crude bulls, we have liftoff. Oil prices skyrocketed this morning after OPEC+ announced that the group of oil-producing nations would cut production in the months ahead.
Brent (the European standard) and WTI (the US standard) crude both ripped higher as stocks gained, too. Shortly before noon, however, the Dow, S&P, and Nasdaq Composite retraced from their intraday highs.
The Dow remained up on the day while the Nasdaq Composite sat on a moderate loss. The S&P split the difference, trading flat.
Recession concerns and political drama – namely, revenge against the US for not wanting to refill the strategic petroleum reserve (SPR) just yet – drove OPEC+ to slash production quotas. The announcement sparked a short squeeze on oil today as hedge funds scrambled to cover their bearish exposure to crude.
Wall Street was predicting a short-term dip in oil due to the banking crisis, as most economists expected a more imminent recession amid a broader “credit crunch” in the US. Hedge funds loaded up on shorts as a result.
Then, OPEC+ dropped its production cut bombshell over the weekend and those same hedge funds panic-covered this morning. Anyone who bought the oil dip made out like bandits.
But did OPEC+ try to trigger the squeeze? Or was it simply a happy accident?
“The scale of the cuts and the element of surprise is likely to have been intended to intensify the rush of short-covering as well as boost confidence and draw more bullish investors back into the market,” explained energy expert John Kemp.
Oil and gas-reliant industries were hit hard by the squeeze, deliberate or not. Auto manufacturers (-3.00%) and airlines (-2.40%) plummeted this morning.
Tech was hurt, too, as rising oil prices should make the Fed’s fight against inflation even more difficult.
“The actual cut itself was less of a surprise, given the large increase in global inventories and recession concerns, likely increased by the recent banking struggles,” said Morningstar energy analyst Stephen Ellis.
“Higher oil prices are likely to provide a modest boost to inflation, providing more of a dampening effect on the economy.”
St. Louis Fed President Jim Bullard, who has long been the Fed’s biggest hawk, was interviewed about the OPEC+ production cut this morning.
“This was a surprise […] but whether it will have a lasting impact, I think, is an open question,” Bullard said on Bloomberg Television.
“Oil prices fluctuate around, it is hard to track exactly. Some of that might feed into inflation and make our job a little more difficult.
Prior to the production cut, Bullard had already anticipated higher oil prices due to recent economic progress in China.
“I think inflation will be stickier,” he concluded.
That whacked growth stocks, which now face a crisis in confidence at the top of a very strong short-term rally.
Will crude hold its gains, though? Short squeezes tend to retrace lower in the sessions that follow the initial “blast.” But make no mistake about it; this rally could have legs long-term. Just don’t expect oil to keep rising in the short-term, though, until it has a chance to retrace slightly.
Short squeezes seldom last longer than a week. And with everyone so incredibly bullish on oil today, there’s perhaps no better time to start looking at bearish short-term exposure.
