Oil is in a correction, and could plunge even further

Oil is in correction territory, down a little more than 10 percent since its most recent high in late January. And while it did catch a bit of relief on Monday, settling modestly higher on the session, I wouldn't buy any short-term strength here.

In fact, I think we have further to fall. My downside target is $55 per barrel; I believe at that level the supply/demand equilibrium would be optimal.

Temporary strength

Crude was trading just below $60 per barrel on Monday, recovering from heavy losses the week before. The main drivers were the weakening dollar, a rebound in equities and OPEC's compliance in maintaining its 1.8 million-barrel-per-day production cut.

However, I believe this is nothing more than a temporary recovery. Anticipated interest rate hikes this year will help provide underlying support to the dollar, which will in turn place pressure on oil. Furthermore, the recent weakness in stocks is concerning, and OPEC's output cut compliance is a wild card at this point.

The bigger picture

Here's the big problem with oil. The commodity's fundamentals simply have too many cracks in the foundation to support higher prices. U.S. production continues to grow, surpassing 10.25 million barrels, and I expect another jump in rig counts this week.

Last week, we saw an increase of 26 oil rigs, to 791 — the highest level since 2015. One result from increased production could be a series of weekly inventory builds from the Department of Energy, and we could see a massive unwinding in speculative positioning, currently near the highest levels since 2006.

Vote
Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.

Videos

Trades to Watch

About

Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more

Connect