Why traders are really bearish on oil

After bouncing back last week, oil prices took a steep dip on Monday. And there may be more downside ahead.

Last week’s high inventory numbers didn’t take down oil (CLH16.NYM). Yet on Monday, Iraq announced its crude production is at record highs.

The difference a week ago, said Scott Shellady, senior vice president at Alpha Modus, is that oil received a boost from European Central Bank (ECB) president Mario Draghi. Last week, the ECB head hinted that increased monetary stimulus could be on the way in March.

“And it was also technically very oversold,” Sehllady said. “The weak shorts got squeezed out late last week."

But with little fundamentally changed for crude, traders got jittery about the rebound’s strength and resumed selling this week. Shellady sees that underlying theme continuing.

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“The story has been the ‘oil price plunge,’” he said. “Just like in interest rates, I think the story is lower oil prices for a lot longer than we thought.”

Shellady expects the oil markets to remain generally downbeat. “We don't want to talk about the ‘R’ word, meaning recession,” he said, “but we've got some startling facts where we've got an all-time record-low participation rate as far as those at work.”

Despite an official unemployment rate of 5%, GDP estimates are generally just shy of 2.5%.

“We've got a manufacturing recession,” said Shellady. “We still don't have any true economic growth, and there isn't any growth out there in the world either, so that's been causing a problem. And that's why we've seen this mentality, this kind of conscientious shift from ‘buy the dips; everything's going to be OK’ to ‘want to sell the rallies; we need to take advantage of every pop.'”

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