Hello, $50. Goodbye, $50…

Fundies, baby.

The fundamentals are bullish — better get buying!

Crude oil.

Right??

Yeah, there was a drawdown reported in U.S. crude inventories last week. The result: Crude oil finally pushed through the $50 range.

Warranted?

Eh.

Probably. And probably not.

Now, I don’t want to say oil can’t climb higher or doesn’t belong above $50 per barrel. It can, and it probably does … at some point.

But right now I tend to feel as though crude oil’s rally is capped.

And I have a handful of interesting market snapshots you should see to help you place your next bet on oil.

***

Crude oil shot up from $32 in February to $44 in March.

I was fortunate to call that right. And the subsequent correction. And the subsequent rally that’s now tested $50 per barrel.

All the same indicators I used to navigate crude’s rebound suggest $50 is a stopping point for now.

Even though I do entertain a slight possibility that WTI crude could extend its rally all the way to $57 from here, I think the deck is stacked against that outcome.

For starters, the crude oil bulls have worked themselves into a frenzy. (Large speculators tend to bet wrong when net positioning becomes extreme.)

Last June, when crude oil resumed its epic collapse, the bulls had built an extremely large speculative position. Today, the bulls have amassed an even larger position.

The only saving grace for today’s bulls is that the price of crude is much lower today than a year ago. This means there is some capacity for crude to "live up" to the bullish narrative.

What is that narrative?

Well, it’s changed a bit in recent weeks.

For the better part of two years, the narrative included things like "North American shale revolution" and "Saudi Arabia ensuring its market share" and "crude oil glut."

Or the simpler narrative: "bearish."

The recent change in the narrative to "maybe not bearish" has been helped by Goldman Sachs’ announcement that global oil supply has actually taken on a short-term trend lower.

In other words: They "rethunk" their $20 per barrel target out loud.

But they have a point …

Some supply disruptions in Canada and Nigeria might have factored into the supply rethink.

Maintenance in Saudi oilfields probably adds to the narrative if it’s believed the Kingdom won’t be able to (further) ramp up production as soon as they threaten they could. (Venezuela be damned.)

Persistent demand is another item Goldman was somewhat surprised by. But hey, who isn’t surprised at how long the global economy has been able to not entirely self-destruct?

So, the latest tidbit adding to this narrative came last week. The U.S. reported that its crude oil supply is a little bit lower than the little bit lower that was expected!

This is the weekly snapshot from the American Petroleum Institute (API) …

And here is the bigger picture from the U.S. Energy Information Administration (EIA) …

Thanks to some crack detective work (get it?) by someone other than me, it appears the draw in crude stocks merely led to an unexpected build in gasoline stocks.

In other words: The draw on crude stocks is not as bullish as it seems.

That didn’t stop traders from running up the price of crude through $50 per barrel on the release.

If I wanted to throw the bulls a bone, for the new "maybe not bearish" narrative’s sake, U.S. oil production did peak a year ago and is still on a slow decline.

If I wanted to take back that bone, I would flash this chart at them — you know, the crude oil cost curve:

Oh, you don’t know the crude oil cost curve? Don’t feel bad — I think this is the first time I’ve seen data like this in such a simple graph form.

So let me try to glean some meaning off this with one sentence:

These days, oil producers can produce a whole lot of oil once the price gets above $50 per barrel.

Probably not surprising, then, that I heard whispers (OK, read articles) recently about producers locking in hedges around $50.

Why hedge your production in a rising market?

Because your production is going to stop the market from rising.

Might as well sign those contracts now!

Technology has increased efficiency. Efficiencies have helped producers reduce costs and increase price responsiveness. They can bring new wells online faster. They can tap into or suspend existing wells more quickly and easily.

A large swath of the industry has been struggling just to keep the lights on for the past year. You can bet they’ll be looking to unload production as soon as it makes even the littlest bit of "cents." (See what I did there?!)

So let me leave you with one last chart and my next bet on crude oil …

As I mentioned earlier, crude could immediately extend this rally to $57.

But I think the likelier scenario is a correction that takes the price of oil down to somewhere between $43 and $39 per barrel before the "maybe not bearish" narrative can regain traction.

You know, then the bears can work themselves into a frenzy … and it’ll be time to bet against them again!

Do right,

JR Crooks

“JR” specializes in trading commodities, currencies and options. He has spent nearly 10 years analyzing financial markets and writing about global economics. JR honed his trading techniques and global-macro worldview alongside his father, Jack Crooks, at Black Swan Capital. JR also…