NEW YORK (TheStreet) -- My main job at TheStreet.com, as the "oil guy" here, is to try and explain the workings of the oil market to people who are not well acquainted with it. As a 30-year veteran of the oil markets, I have seen just about everything that they can throw at us. And in the last week, they've thrown quite a bit.
One of the first takeaways that I can give you as an oil "expert" is to ignore most of the headlines that you will see trying to explain large daily swings in the oil price, such as you had this week particularly on Monday and on Thursday. Headlines when markets go down will usually scream something like "Oil glut forces prices lower" or "Saudi production increases weigh on oil prices."
Similarly, when prices rocket higher, as they did on Thursday, you'll see a headline like "Chinese worries abate and allow oil to rally" or "Stock market jitters retreat as oil streaks to its best day in 6 years."
Ignore all of these. They are macro signposts that are used by talking heads in order to frame a story that they otherwise can't explain. The long-term story of why oil might be trending higher or lower could have a lot to do with these headlines, but usually a quick and violent move is being driven solely by financial pressures, not fundamental ones.
Let's look at the down day of Monday, when oil dropped to close to $38 a barrel. Chinese worries on the overvaluation of their stock market destroyed the U.S. stock markets as well, and oil almost always stays on track with big moves in equities. But more was at work here.
The most important factor in Monday's oil price collapse was the threat of a currency war, begun with a Chinese devaluation of the Yuan. This forced the dollar higher and that had the most immediate impact on oil prices. Because oil is priced globally in dollars, the threat of a devaluation war, pushing the dollar even higher in the future forced many funds and machines to instantly sell oil at any price.
Notice that nothing fundamental in the demand or supply of oil had changed on Monday. But the oil market moved spectacularly on the sole basis of financial connections.
Again on Thursday, when the oil market historically rallied, we can find several financial factors for it and few fundamental ones. The most important one that I saw was the fantastic increase of short positions from speculators that had accumulated in the oil markets in the previous two weeks. The drop on Monday had added to those numbers of shorts and barring any major fundamental change to drive even more shorts into the market, oil was ripe for a fantastic "short covering rally" -- which is precisely what happened.
Here is a chart of just how short the market was -- notice that it is very rare to find such a preponderance of speculative shorts in the oil market and this almost always makes for a very messy rally.
Again, fundamentally nothing has changed in the oil markets. There is still, I believe, a relatively long period of depressed prices yet to come. I believe we'll see prices below $50 for the next several months at least but don't believe we'll breach $40 again.
The signs for a turnaround into a constructively rallying oil market are just beginning to accumulate, which should suggest that smart investors should begin looking at the oil sector as the next leading sector for 2016 and beyond.
But remember that investing in oil and oil stocks will always be subject to several financial factors that sometimes seem to have absolutely nothing to do with oil.