Oil rallied, heading for the biggest two-day advance since 2009 after a slump to a 12-year low prompted some investors to buy back record bearish bets.

Front-month futures have jumped more than 19 percent after the February contract expired Wednesday at $26.55 a barrel, the lowest settlement since 2003. Speculators this month amassed the biggest-ever short position in U.S. crude amid concern that turmoil in China’s markets would curb fuel demand at a time when fresh exports from Iran exacerbate a global glut. Oil may be the “trade of the year” if it can weather the surge in the Middle East producer’s shipments, according to Citigroup Inc.

"Oil is going to rally into the spring," said James Cordier, founder of Optionsellers.com in Tampa, Florida. "It’s a short-covering rally, but we do think it has legs to continue."

David Fuller's view

Crude oil has been experiencing a perfect storm.  However, there is a growing consensus among forecasters, which I have mentioned recently in an Audio or two and also in my Markets Now presentation on Monday that prices for Brent and WTI crude oil will either be higher in the second half of the year or in the first half of 2017. 

Those forecasts have to make the many short-sellers who have helped to drive crude oil prices lower more wary.  In other words, if the next big move is likely to be upwards, why not take profits on short positions now or at least protect them with trailing stops? 

Brent and WTI crude have only risen for the last two days after reaching this year’s low to date on Wednesday.  However, the article above points out that this is “the biggest two-day advance since 2009 after a slump to a 12-year low”. 

Our conclusion is that we have seen a low of at least near-term significance and that it could easily be stronger.  If so, and having previously mentioned that the lower oil fell the more quickly it would rebound, if we have seen an important low this week then oil should continue to rally, mainly on short-covering, for several weeks. Thereafter, oil prices should spill over into a reaction and consolidation.  For cognoscenti from The Chart Seminar, this reversal pattern would be V-bottom with right-hand extension.