I started writing this post two weeks ago, after oil nailed our latest downside target (from Jul 31: 46.46) and was rallying nicely.   Of course, a lot has happened since then.

I had been taken aback by the news that Andy Hall, such a prolific oil trader that he earned the moniker “God,” was shuttering his main hedge fund after sustaining a 30% loss trading oil so far this year.

I know nothing about Andy’s investment strategy or trading style [though he had a “colorful” reputation]  But, this was a stark reminder of how fundamental analysis has utterly failed oil traders. We have only to look at the recent post-Harvey fluctuations to see the disconnect.

In the past three years, our periodic, directional calls on WTI have averaged over 500% annually.  Our success has rested almost entirely on ignoring fundamentals and focusing on the things which have mattered: inflation, interest rates and stock prices.

continued for members…For new members, the basic thesis is that while the Fed says they want higher inflation, they really just want a higher dollar to keep inflation under control…but, interest rates that are low enough so the deficit doesn’t spiral out of control even faster.

CL is at a critical reversal point, and I believe it’ll drop from here.  While I’m open minded regarding a breakout (use stops!), I think the recent runup in gas prices will generate an unwelcome increase in CPI if left unchecked.  Of course, they needn’t move in lock step.  We’ve seen many instances where CL rallied while RBOB tumbled, and vice versa.

August’s CPI numbers weren’t terribly affected, but September’s will be above 2% if gas prices don’t come back down.  This would force the Fed’s hand regarding interest rates, which of course is something they want to avoid.

I’m running out for a meeting, but have more commentary to add this afternoon. I’ll leave you with these charts for now.  I believe they tell the story quite well.  I’d continue to be short RB and CL, though CL is clearly threatening a breakout.