Trading Nation

Last four times oil did this, huge rallies occurred, and it's very close to doing it again: Tom Lee

Tom Lee on oil’s hidden drivers
Tom Lee on oil’s hidden drivers

Veteran strategist Thomas Lee, who's made several contrarian calls which have evolved into great buying opportunities, is predicting an oil rally will soon wipe out losses from the latest downturn.

He says oil futures are on the verge of moving into "backwardation," a term used to describe a market anomaly when futures contracts that expire later are trading at lower prices than contracts that expire sooner.

The last four times oil moved into backwardation, the commodity rallied between 25 percent and 72 percent in the next nine months, according to Lee.

"We're approaching a flip back into backwardation, meaning the spot price is approaching and may soon exceed the 24-month contract. That's normally a market imbalance," said Lee, who is Fundstrat's Head of Research, on Wednesday's "Trading Nation."

Lee is no stranger to making contrarian calls that manifest into big profits.

He's been recognized for telling clients to view Brexit's violent losses last June as a buying opportunity. The stock market regained nearly all its losses within about a week.

Lee predicted President Trump's election win last November as a strong positive for stocks while profit-taking was running wild. Since the election victory, the has soared nearly 13 percent.

The latest forecast comes as WTI crude oil is on track for its third monthly loss in a row, closing below the psychological level of $50 a barrel on Wednesday. Brent also traded lower, and the S&P energy index was deep in the red.

"Our investors and clients are overly pessimistic on oil," added Lee. "The market is coming into balance."

Lee cites the confidence in demand growth, a flatter, weaker , and optimism that we'll see production discipline as reasons to support a sustained oil rally in the coming days.

Even though Lee notes that he isn't an "oil expert," he also points out that June since 2002 is typically a positive month for the commodity.

"Consumption and demand has been growing every year," he said.