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Will Oil Rebound Sharply as it has in the Five Prior Episodes?

Oil was crushed about 8.5% yesterday following a rise in inventories.  As noted oil just had its biggest gain in six years, gaining 19.5% in four days for a myriad of reasons including a vastly oversold market, lower rig count and statements from OPEC suggesting oil is around a floor.

Today’s prevailing narrative is oil’s gains are vastly overstated and the advance is nothing other than a dead cat bounce and the slide should soon continue.

As noted many times, since 1990 there have been five major declines, defined as an average decline of 48%.  In each occurrence oil was about 52% higher six months after oil bottomed.  Each decline had its unique circumstances.

The last major oil decline was during the 2008-09 financial meltdown.  Similar to today, oil rebounded sharply for three days and then fell sharply on the fourth day.  A Reuters newswire story was similar to today’s prevailing narrative…oil should continue its downward trajectory because of financial and economic contagion.

Many times I have commented things are never different there are just different people. Will oil rebound sharply as it has in the five prior episodes?

As stated each decline has its unique circumstances.  I believe today’s uniqueness is the possibility of countries ceasing to exist versus companies where the Middle East is facing the greatest civil unrest since the dissolution of the Ottoman Empire 100 years ago.  I will argue this potential narrative is not even remotely being considered.

Commenting about yesterday’s market activity, all markets closed relatively unchanged as the ECB tightened the terms of Greece’s bailout.  The ECB lifted the waiver on Greek government debt as collateral citing doubt over the commitment of the new government to previous reform pledges.

What will happen today?  Will the markets be quiet again ahead of tomorrow’s BLS Labor Report?  There was little reaction to the ADP Private Sector Employment report.

Last night the foreign markets were down.  London was down 0.20%, Paris down 0.28% and Frankfurt down 0.04%.  Japan was down 0.98% and Hang Sang up 0.35%.

The Dow should open moderately higher even as the ECB is toughening its stance on Greece.  Futures are also being inspired by a merger in the health care area.  The 10-year is off 8/32 to yield 1.78%.  Oil is up about $1.

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Ken Engelke

Chief Economic Strategist Managing Director

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