Amid weak fundamentals that have kept the price of West Texas Intermediate crude (WTI) at embarrassing levels for over a year, an improvement was noted on Thursday. The big question now is what prompted the spike in the price of WTI crude, which recently touched the lowest level of $29.93 per barrel since Dec 2, 2003, especially since supply remains plentiful and demand lacks luster.

Short Covering

Since mid-2014, the market has been witnessing a freefall in crude prices owing to an oversupplied commodity market.

Investors should note that in reality, a war for market share has been raging among the likes of the Organization of the Petroleum Exporting Countries (OPEC), the U.S. and Russia. Each of these markets has been pumping hard and competing for market share, completely ignoring the downtrend in oil price. This further weakens crude fundamentals.

All the events led crude to touch a level this week that wasn’t seen in the last 12 years. As a result, some investors thought that is the time to make some profit through short covering believing that there aren’t enough forces left to take the commodity down to a large extent. By definition, short covering indicates the purchase of commodities which have already been sold short.

Short-sellers who shorted oil futures at higher prices earlier where waiting for crude to go down further to book profit buying back the futures. But after oil touched the record low level they decided to make some profit by short covering. Hence, by buying back the crude futures the price of oil started recovering. Owing to this, WTI crude rose 2.4% to $31.20 per barrel on the New York Mercantile Exchange yesterday.  

However, the probability of Iranian oil flood in an already oversupplied market and weak fundamentals capped the long-awaited gain in crude price.

5 Prominent Picks

Naturally the companies having positive correlation with oil prices will gain. The firms are oil and gas exploration and production players along with the drilling and oil field services firms. The oil field services players assist the upstream players to efficiently use the wells to pump out oil.