Record Short Squeeze May Cause Oil to Spike Further, Says John Kosar

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When we last spoke to John Kosar at Asbury Research earlier this year, he told Financial Sense Newshour listeners to watch for a spike in oil this summer (see Oil May See a Huge Spike This Summer, Says John Kosar).

So far, that's exactly what's happened and Kosar warned a further spike is possible if commercial hedgers are forced to liquidate their record short positions and buy in at higher prices, which appears to be happening now.

"This looks like the beginning of short covering where hedgers are starting to throw in the towel on their shorts because open interest isn't going up, it's going down. So they're actually liquidiating contracts, selling them at higher prices. If this is the start of a liquidation phase by those hedgers, this thing could go a lot higher than it is right now."

How high is high? Kosar thought oil could possibly shoot up as high as $100 a barrel, something that energy expert Robert Rapier also noted on our program last week.

Testing 200-Day Averages

Several major indexes are testing their 200-day moving averages, Kosar noted, which could be noting a change in market trend.

There's also a fail pattern in France, Kosar noted, and some other foreign markets have already started to show signs of breaking down, especially those that are positively correlated to the S&P 500.

“That looks like our market is rolling into correction, and it looks like we’re the cleanest shirt in a dirty hamper, to use that old saw,” Kosar said. “Looking around at the global indexes — including Europe, China, and Japan — most are already significantly underneath their 200-days. … I don't think this bodes well.”

The Nasdaq and small-cap indexes continue to do well and, in a healthy market, we normally see leadership from tech and often from small caps. Usually, the Russell and the Nasdaq 100 will outperform versus the S&P 500 in a healthy uptrend.

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Source: Stockcharts.com; Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly

Interest Rates

Nearly everyone is looking for interest rates to increase here. But interest rate markets tend to be counterintuitive, Kosar noted. While the Fed continues to talk about raising rates, we’ve seen the 10-year come off its recent highs to around the low 280s. This looks like rates can continue to fall, Kosar noted.

The yield on the 10-year might head down around 2.60 to 2.65, Kosar stated. Usually, rates stay steady for a while, and then move rapidly.

This will take some kind of outside catalyst, Kosar noted, but with his anticipated turn in equities, we might see interest rates go lower.

“What might help to get us there … is if the stock market continues to weaken,” Kosar said. “The globe has broken down and we're following. We're still strong stocks-wise relative to most of the rest of the world. But if we continue to weaken here, that's going to push some money out of equities and back into the safety of U.S. Treasuries, which will drive those yields down even farther.”

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