Executive Summary

• Oil patch defaults will be the trigger that burns down the markets
• Defaults will ripple widely across many industries and sectors
• The banks are suddenly turning on their central bank brethren
• How to protect yourself from the coming era of wealth destruction

If you have not yet read The Return Of Crisis, available free to all readers, please click here to read it first.

Oil Troubles

The financial sector may be suffering through a bad time, but the oil sector is experiencing something far worse. While overall demand for petroleum is flat or down nearly everywhere, every producer is pumping like mad either to achieve a geopolitical agenda (as with Saudi Arabia and Russia) or to simply survive.

This chart of the price of WTIC oil also sports a pretty convincing head and shoulders formation, a common warning of “lower prices dead ahead”:

It looks like the $30 mark is the area to keep a close eye on, as that represents one possible ‘neckline’ to the H&S formation drawn above.  If that fails, look out below. Expect that area to be defended pretty vigorously by those institutions long oil.

I'm anticipating quite a skirmish over the $30 mark. Here's why:

Total wagers on the price of crude climbed to the highest since the U.S. Commodity Futures Trading Commission began tracking the data in 2006. Speculators’ combined short and long positions in West Texas Intermediate crude, the U.S. benchmark, rose to 497,280 futures and options contracts in the week ended Feb. 2.

(Source)

I’ve tried to make that double right axis chart easier to read by circling/drawing the correct positions for each line. It’s a little confusing because the short interest is drawn on the chart above the long interest. But looking carefully, we can see that speculators are holding ~195,000 contracts short and ~300,000 long. That means there are roughly 50% more longs than shorts.

However, both have increased their bets over recent weeks. One way of looking at this is to note that speculators are now driving the price of oil more than at any other point in history.