The May crude oil futures contract has had a strong close for the past few trading sessions. The trade had a few different reasons to rally. The EIA report this week did in fact show a build in crude inventories at Cushing, but by less than 1M barrels, as compared to the much larger builds we have seen over the past few weeks (last week was a 5M barrel build). We were in oversold conditions, and a double bottom was formed in the near term near the $47 lows this month. We also had some stronger Economic data out this week as well as GDP data today showing a slightly friendly 2.1% growth. The crude market is still ripe for long liquidation. The latest COT report showed a long position of 493,000 contracts, off from the record of over 600,000 before crude broke $50, but still heavily weighted on one side of the equation.
The main driver behind this rally, I believe, is the widely held belief that OPEC is going to extend their production cut agreement past June when it is set to expire. This was no surprise as they had to do something to prop prices up. Even if crude manages to claw its way back to the mid $50 level, I believe that any rally will be sold into given the incredible glut of oil in the world (37% above the 5 year average to be exact). OPEC is in a tough position. If they cut production further or extend their agreement, the US shale producers become more profitable as prices rally on the news. If they do nothing the prices collapse and their efforts were for nothing. There are ways to play this crude situation correctly.