Crude oil is doomed to fall first

Since OPEC agreed to cut their production a few weeks ago, crude oil has started an impressive rally and reached to around $55 not seen for almost two years. It seems a bullish case for oil is strong, with the expecting improving economy in the US under the new administration and a reduced supply from OPEC. I certainly agree and also cautiously believe that oil may have a brighter future over long term. But I highly doubt, oil will simply go up from here and actually a 20% correction is a good chance to happen in weeks ahead. Two major reasons:

• While OPEC countries are still the major oil producers, US has become equally an important oil producer now. Due to the severe bear market of crude oil in the past 2 years, almost all the US oil companies are cutting back their production but this can change very quickly. As reported, when oil price is consistently over $50, majority of oil companies using the new drilling technology, fracking, may be profitable. As such, they will not just sitting on their hands with increasing oil prices but will turn on their idle rigs to work again. It means the supply will quickly go up to offset the supply reduction from OPEC. The higher the oil price goes, the more supply we will see, which will depress the oil price accordingly. A consistently higher oil price can only be sustainable if the demand becomes really strong. I don't think we are at this point yet. So fundamentally, it is quite possible to see a lower oil price from here.
• Similar to the contrarian indicator I talked about regarding Treasury, the recent COT report is sending a very strong signal, indicating that the sentiment for oil is at an extremely high level with overwhelmingly bullish long positions held by the speculative traders, the dumb money! The bullish sentiment is so strong that we have only seen 2 times in the past year or so at such a degree and each time, a 20%ish crash of oil followed. Will this time be different? Certainly it is possible, but if history is any guidance, I think more than likely we will see a sharp oil correction in the weeks ahead, possibly also in the scale of 15-20% decline.

I think the crude oil technical pattern is also turning to bearish now, suggesting a much lower oil price is coming. Be cautious if you are euphoric about oil at the moment!