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Here's why traders are betting the oil recovery will be muted

What's up with oil?

It was down yesterday morning on reports of higher inventories, then higher later in the day on vague reports OPEC was considering extending supply cuts.

Despite the confusing signals, energy stocks are sending a very negative story: Oil is likely to remain in the low $50s for the rest of the year.

The evidence is everywhere. Chevron is at a new low for the year. ExxonMobil is trading like death, down nearly 9 percent for the year. The SPDR S&P Oil & Gas Exploration & Production ETF, heavily weighted toward U.S. producers, is down nearly 5 percent for the year.

A broader measure — the S&P energy sector, is also down more than 5 percent for the year. Only the tiny S&P telecom sector, down 5.6 percent, has more negative performance among the S&P's 11 sectors.

Look, I know the drill, this sector was going out of business at this time last year. It's had a tremendous move since the February 2016 bottom, up 25 percent or more. It rallied into the end of last year.

I know all that. But I also know the market has been drifting higher since the beginning of the year and oil stocks have been drifting lower. And it's not a one-day affair. It's a clear trend.

A reasonable conclusion is that there is a valuation problem for Energy stocks. The markets are still discounting a significantly higher price for oil, and a lot of people seem to doubt it is coming.

How much higher? I don't know, but a lot of people at the end of last year were talking about oil in the $60s or even $70s in 2017.

The bulls still believe we are in an up-cycle. "Demand keeps growing, OPEC has pulled back, technology continues to improve well results (and returns), fast production declines from shale wells still need to get replaced," one hedge fund trader specializing in trading oil stocks told me today.

But look at the supply side. Traders have noted that more than 200 additional rigs have been added. U.S. production is back up to 9 million barrels a day.

The bulls keep talking about the fact that a number of companies raised their estimates for capital expenditures. That's good news for oil service companies, but it doesn't change the facts: they are throwing a lot more money into a market that is well oversupplied.

A floorhand operates a Chevron oil drilling rig near Taft, California.
Chip Chipman | Bloomberg | Getty Images
A floorhand operates a Chevron oil drilling rig near Taft, California.

And oil? It's $53, exactly where it was two years ago.

That's right, oil was $53 on this date two years ago. It touched $60 briefly in June of 2015 and hasn't come close since.

What needs to happen? In the short run, we certainly need to see inventory levels come down, but that doesn't look like it's happening either.

You can see why the energy bulls are having a tougher time of it recently.

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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