Why Oil Prices Fell Back Below $70

One of the biggest mistakes I have seen traders make over the years, and to be honest it is also something of which I have been guilty many times in the past, is the desire, need almost, to trade in the “logical” direction on every piece of news.

Very often, though, the better trade is to fade the initial reaction when circumstances appear to change.

This week, for example, reports surfaced that OPEC+ were going to postpone their scheduled crude output increases for a couple of months.

Those reports came out on Thursday, but here is the chart for that day, up until 1 pm.

The news did cause an initial spike, but those gains were quickly given back and by the afternoon, WTI was trading lower than it was before the “bullish” news surfaced.

Why is that and, more importantly in many ways, what can we learn from it?

The first thing to point out is that OPEC+ not increasing output wasn’t really “news” at all. It had been rumored for a while and was to a large extent priced in before the stories were published. That is in large part due to the fact that oil has been falling for a few weeks. Three weeks ago, when crude was up around $77 per barrel, I wrote a piece predicting just that. I am not pointing that out to show how smart I am, although you can of course feel free to think that, but rather because the conditions that made that move predictable are still in place.

The last few weeks have not been about the supply side of the pricing equation.