The Oil Rally: More Than Just A Short Squeeze?

Crude oil closed out its largest three-day price surge since 1990 on Monday, and the United States Oil Fund LP (ETF) (NYSE:USO) is up more than 23 percent in less than a week. Oil bears on Wall Street are arguing that the movement is simply a temporary short squeeze following WTIs drop to around $38/bbl in recent weeks. However, oil bulls see reason to hope that the move marks a sustainable change in direction for oil prices.

Short Squeeze?

In mid-August, Benzinga reported on data that indicated the oil market was primed for a large, short squeeze. The ratio of long-to-short WTI positions held by hedge funds and other money managers had fallen to its lowest level since 2010, suggesting that any upward price movement would be likely to lead to a short squeeze.

Related Link: Mid-Day Market Update: Crude Oil Surges 5.5%

For oil bears, the resulting spike is simply temporary forced buying. Sharp gains over the past three trading sessions were driven by a combination of short covering and chart-readers looking to call a bottom falsely, Citi analysts wrote in a recent report.

Bears remain confident that the supply glut that caused the crude oil price collapse will not be eliminated any time soon.

OPEC Reaction

Despite persistently weak fundamentals in the oil market, oil bull now have several reasons for hope. First, the latest OPEC Bulletin publication contained commentary that oil bulls say suggests that the organization may be increasingly open to discussing the possibility of easing production.

As the organization has stresses on numerous occasions, it stands ready to talk to all other producers, the report read. But this has to be on a level playing field. OPEC will protect its own interests.

EIA Data

Perhaps the brightest news for bulls is the latest data from the Energy Information Administration (EIA). According to the EIA, the United States produced about 9.3 million barrels of oil in June, 100,000 less than the May output and 250,000 barrels less that the EIA had predicted. The June production number could be a sign that the supply glut may soon be shrinking, a possible signal for a bottom in the oil market.

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