My friends in Texas aren’t going to like hearing what I have to say today.

Oil prices have enjoyed a huge run higher over the last six weeks… But the trend won’t last.

As I’ll show you today, we aren’t out of the woods yet in the oil sector. Let me explain why…

[ad#Google Adsense 336×280-IA]On February 11, the price of West Texas Intermediate (“WTI”) crude oil – the U.S. benchmark – bottomed around $26 per barrel.

Since then, oil prices are up almost 50%… an incredible move in just six weeks.

As regular Growth Stock Wire readers know, the sentiment surrounding oil prices has been ugly in recent months.

According to Jason Goepfert, who runs the excellent SentimenTrader website, the outlook for oil has been “excessive pessimism” since November, and bottomed in mid-January.

When sentiment toward a commodity is that one-sided, it’s usually a good sign to bet against the crowd. In this case, you would have made almost 50%.

However, all that pessimism led many traders to be “short” oil. Folks were betting against oil prices… even when they were at all-time lows. When oil prices turned higher, the traders had to scramble to close their positions – or buy back shares. Of course, that pushed oil prices up even faster.

This type of activity is called a “short squeeze.” Think of it like a game of musical chairs. The music stopped and everybody scrambled for a seat.

According to the U.S. Commodity Futures Trading Commission, the volume from these traders closing their short positions was the largest on record.

Of course, that doesn’t mean that oil’s price is out of its bear market. As John Kilduff, partner at investment manager Again Capital, told Bloomberg Business…

The rally has come from shorts getting scared out of their position, and you’re not seeing a lot of money coming in on the long side.

In other words, smart investors shouldn’t view the recent spike in oil prices as a new bull market. There is still way too much oil in the world and not nearly enough demand. And while the oil price rallied to $40 per barrel… that still isn’t high enough to keep most U.S. oil firms solvent for long.

That’s why shares of oil companies aren’t soaring right now. The following chart compares the performance of the SPDR S&P Oil & Gas Exploration & Production Fund (XOP) to the price of WTI crude oil in the last two months…

As you can see, while oil prices are up almost 45%, XOP – which holds nearly 60 oil and gas companies – is barely up 20%.

Don’t bet on oil prices going higher from here over the long term. The sector isn’t ready yet.

Good investing,

Matt Badiali

[ad#stansberry-ps]

Source: Growth Stock Wire