Crude Oil and oil markets

[anon46773462]

We have talked here a few times about the negative impact of low oil prices on the government revenues of oil producing nations.

An article published today by the Stockholm International Peace Research Institute (SIPRI) gives an interesting perspective on how low oil prices are affecting one aspect of expenditure by a number of oil-dependent countries. Many oil-exporting countries are beginning to report significant cuts in their military expenditure:

‘Falling oil revenue and associated economic problems attached to the oil-price shock has forced many oil-exporting countries to reduce military spending,’ said Dr Nan Tian, Researcher with the SIPRI AMEX programme. ‘For example, between 2015 and 2016 Saudi Arabia had the biggest absolute decrease in spending of $25.8 billion.’"

"The largest cuts in military expenditure in 2016 related to falling national oil revenues were in Venezuela (–56 per cent), South Sudan (–54 per cent), Azerbaijan (–36 per cent), Iraq (–36 per cent) and Saudi Arabia (–30 per cent). Other notable decreases were seen in Angola, Ecuador, Kazakhstan, Mexico, Oman and Peru. Only 2 of the 15 countries with the largest falls in spending in 2016 are not oil exporters. "

Some other interesting highlights from the same report:

[I]“Total world military expenditure rose to $1686 billion in 2016, an increase of 0.4 per cent in real terms from 2015”
"Military spending in North America saw its first annual increase since 2010, while spending in Western Europe grew for the second consecutive year.

The United States remains the country with the highest annual military expenditure in the world. US military spending grew by 1.7 per cent between 2015 and 2016 to $611 billion.

Military expenditure by China, which was the second largest spender in 2016, increased by 5.4 per cent to $215 billion, a much lower rate of growth than in previous years.

Russia increased its spending by 5.9 per cent in 2016 to $69.2 billion, making it the third largest spender.

Military expenditure in Western Europe rose for the second consecutive year and was up by 2.6 per cent in 2016. There were spending increases in all but three countries in Western Europe. Italy recorded the most notable increase, with spending rising by 11 per cent between 2015 and 2016.
[/I]
Source: Home | SIPRI.

[anon46773462]

So we did indeed see bit of a bounce off these key areas today around the 200 sma and the up channel.

But whether this is sustainable will depend on the first of the US Crude Oil inventories weekly data releases tomorrow from the API.

With US warships close to North Korea afterall, and this time with a nuclear submarine thrown in for good measure - as well as another day nearer the OPEC production cuts extension in May still with no confirmation for Russia that it is going to continue to join in - anything could happen!

But for now, a bit of relief from the downwards pressures - but not a lot…:

Daily chart:

[The_Forex_Sniper]

I am a profitable trader and I am offering weekly analysis for free. Here is what I’m expecting oil to do this week.

[av0224]

Today crude shows nice up trend as I prefer but in 1 minute chart and can go upto 49.96+/.10 without any struggle. Since 5M is not yet shown up but sure will show up, I am in now. Let us see.

[anon46773462]

Hi AV!

Good luck with your trade!

With the overall main focus being on crude inventories at the moment, and the EIA data being released later today, you may well see some good opportunities on the short term charts today before its release.

[av0224]

Having already done my short trade for the day (probably out again much too soon but let’s see!), I’ve now turned my attention to another term in the oil industry - the FPSO / FSO - used for temporarily storing crude oil.

Early exit is good with these beasts rather than with little profit or loss. What happened yesterday suddenly spiked which i am seeing in other commodities as well. Particularly when they approach to
any one of the extreme side. For example, when silver in very peak and everyone was expecting next level, just in five minutes made drastic down and I also had good loss but in profit due to tight SL.
Just my observation.

[anon46773462]

Since the overall focus is very much on changes in crude inventories, it was not surprising that there was no sign of fresh selling ahead of this week’s inventory releases.

The downside for now seems to have stalled around the 200 sma, which apparently is a benchmark level widely looked at. However, based on the charts, there is no evidence yet to suggest this down move is over, rather we are at a typical pause session awaiting fresh input and I see possible upside limits around 50.20 and 50.75 for short term trading.

PS: The “High-5” trade 5-Day stop is now at 52.605 (from 19.4.). Entry level was short at 52.275 on 18.4. Position at close yesterday: + 292.50 pips

Daily chart:

Yesterday’s upside is shown a bit clearer on this 1 Hour chart. It is a variation of my normal 1H chart in order to show the ribbons clearer, which form my entries. The blue ribbon has been crossed upwards since yesterday - and still is - but it is up against the overhanging green band which is the 4H chart band (which is compressing as the move runs out of momentum).

I need to see a close below, and a crossover of, the blue ribbon back downwards before (re)selling:

…and, again, nothing to do with crude oil. Here we were deep into the new growth of a fresh, sunny spring and this was the view this morning…it is not just markets that can be fickle, luckily haven’t changed my car tyres yet…!

[av0224]

Hi AV!

Good luck with your trade!

With the overall main focus being on crude inventories at the moment, and the EIA data being released later today, you may well see some good opportunities on the short term charts today before its release.

Not good luck, just luck only today it seems. I was out with little profit and no more trading in Crude today, staying away, You can have a look at Natural Gas for the trend I use to follow just FYI,

[anon46773462]

…and as we were pondering in an earlier post, when all the commentaries end up 100% in the same direction, it is time to be wary and look the other way!

And so it seems with today’s EIA weekly Crude Oil inventories release. I have not read any analyses yet but it seems we had a much bigger draw than expected and the market shot up immediately.

However, being a cautious trader, I am waiting for price to settle down before deciding what to do next. There was really only one trade prior to the number when that blue ribbon on the 1 Hour crossed and the bar closed under the Daily Pivot for the first time since the early hours in the Far East - that was good for a quick 20 pips. But otherwise it was a slow and directionless day - until the release that is!

But the price is currently too high above the upside breakout for me to buy here. We only have two trading days left this month and I really want to end with a decent profit, so I am double careful about doing anything rash at this stage to spoil that… besides that:

a) I don’t have an identifiable sensible stop level at present

b) I am not convinced this one figure blows away all the recent negative arguments in one puff and it could still give way at any moment.

result? I’m sidelined for now!

The 1Hour now looks like this:

[anon46773462]

Surprisingly quiet evening following a release that was so far from expectations…

Trouble is, whilst crude stocks saw a large drawdown of 3.6 mill barrels that was only expected to be around 1.75 mill, and therefore bullish, there was also a large increase in gasoline inventories of 3.37 mill barrels compared with an expected increase of only 1.54 mill, and therefore bearish…stalemate!

But one other interesting bit of news. Apparently, Pemex, the Mexican State oil Company has decided to hedge its entire oil output for the rest of this year, locking in a price of $42 per barrel for up to 409,000 barrels per day. The Finance Ministry has,apparently, based its budget forecast on this sum reflecting a skepticism about further revival in prices this year.

If I remember rightly, Russia has earlier talked of basing its own future budgets on a similar level…

If we do not manage to finish today on a firm note following such a large draw in crude inventories, then it suggests to me there are other real downside factors at work here.

[anon46773462]

@anon46773462

…The downside for now seems to have stalled around the 200 sma, which apparently is a benchmark level widely looked at. However, based on the charts, there is no evidence yet to suggest this down move is over, rather we are at a typical pause session awaiting fresh input and I see possible upside limits around 50.20 and 50.75 for short term trading

After yesterday’s EIA data, the above-mentioned scenario seems still to be valid. We just fell short of the 50.20 level with a high of 50.17, and the daily 200 sma still seems to be holding…but the upmove was very short-lived in spite of the huge drop in crude stocks and slumped back to the same levels we were at before the release:

There are some fascinating scenarios concerning where we go from here. It would be short-sighted to only look at the crude storage situation because the oil market is a process and it takes many months for oil to pass through it from bedrock to gas station:

oil production=>transport=>crude storage=>refinery=>gasoline storage=>distribution=> gas station=>consumer

Yesterday’s EIA data showed a large drop in crude inventories but also a large increase in gasoline inventories. This is surely normal as the refineries end their seasonal maintenance and build stocks for the traditional summer driving period…but there are unusual situations currently at each of these points in the process:

Production: Will OPEC and the other 11 non-OPEC producer countries extend their productions cuts in their May meeting? by how much? Will the increasing US shale oil production continue to counter the impact of these cuts?

Crude stocks Whilst global crude stocks have generally dropped a little, they are still well above the 5-year average level that OPEC wants - and even if that level were to be achieved, would it also increase prices or just produce better stability at these low price levels?

Refining: Whilst it is normal for refineries to step up their processing at this time of year, the US refinery capacity is already at record highs above 90% (at least, So I have read). So unless there is significant increase in consumer activity out one end, there will be a slowdown in draws from crude stocks at the other.

Consumption: There are reports that US gas station sales are currently below last year’s levels. There is also speculation that the increase in low-consumption and electric vehicles will already significantly reduce demand. This, together with reduced consumption from more efficient commercial vehicles, and combined with an increase in much cheaper wind and solar energy, will tend to de-couple the link between overall energy demand and the demand specifically for oil products. In addition, there are downgrades in overall economic growth in many places.

All in all, there are many issues right now in addition to the basic supply v. demand equation.

On balance, the charts are still negative, but showing signs more of stagnation and uncertainly that any specific trend and this is also noticeable in a widening of spreads, both during last night’s quiet period and again this morning.

My own strategy at present is to grab quick moves off the 15min chart as and when it makes sense with respect to the 1 Hour. Yesterday offered 2 reasonable intraday sells and today also looks more prone to the downside - but I am waiting for the NY session…

[anon46773462]

Well the direction was downwards today and the 15 min chart certainly did give a good signal early this afternoon, after having spent most of the morning in a state of compression (shown circled in red).

Price had already been continually below the Daily Pivot (blue dotted line) and then the two ribbons just dropped out of the green band and didn’t look back for some 4-5 hours and about 100 pips (I didn’t get that many! ).

Some comments state that the inspiration for this down leg was the announcement of two big oil fields in Libya, Sharara and El Feel, coming back on-stream pumping oil after recent clashes. Although the additional volume is only about 390,000 barrels a day, it was enough to depress an already negative tone that was just looking for a reason to sell off further.

One thing that pleased me much today (still being a newbie at trading crude): I have often referred to the daily 200 SMA which I had remembered hearing somewhere is one benchmark that the oil market watches. Now, today I read one comment:

“Prices have come under pressure on news from Libya…and quite importantly a break below the 200-day MA.", Eugene Weinberg, head of global commodities research at Germany’s Commerzbank in Frankfurt, told Reaters Global Oil Forum.”

Well there’s the official confirmation of its relevance! As a result, I am now going to officially promote myself from “Newbie” to “Junior trader” of Crude!

The Daily chart is evidencing some struggling around three things here: the daily 200 SMA, the base of the upwards trendline, and the $50 level on Brent crude which is more of an international benchmark than WTI and is currently trading around 2,3 dollars above WTI.

[anon46773462]

Having poked around that general broad area of support formed by the daily 200sma and the $50 a barrel level on Brent, the market started a firm and continuous move back up away from those levels. We are also forming a series of long tails on the daily candles (underlined in brown) whenever we approach the equivalent of $50 on the international benchmark Brent oil. Is this the level that long term buyers are entering the market?

We are also forming some kind of noticeable level at 49.60, which can be seen on the daily chart but I don’t really see it as anything major, but we seem to have halted there many times.

And contrary to what one might have easily assumed during the day’s earlier down move, we again failed to close under that 200 sma:

I read two releases that may have accounted for this intraday reversal (which has also held overnight):

1. The World Bank issued its latest Commodity Markets Outlook, in which it states that overall energy prices will increase 26 percent in 2017. It is overall optimistic for oil, expecting supply to tighten in the current quarter as OPEC and non-OPEC production cuts start to affect global supply. (worth remembering that there is a time lag of a few months between production cuts and their impact on crude inventories)

The World Bank is therefore expecting crude prices to reach $60 a barrel next year – the same price level that Middle Eastern producers would like to see. But they also maintain that prices are unlikely to go much higher than this due to the effect of continuing increasing shale output.

2. In another report, the International energy Agency (IEA) confirms that the volume of new oil discoveries hit a record low in 2016 as a result of severe cuts in exploration budgets. Globally, the oil industry only discovered 2.4 bill barrels last year compared with the 9 bill barrels that have been discovered on average each year for the past 15 years.

In addition to a record low in new discoveries, there was a steep reduction in the number of new conventional drilling projects started. Since conventional projects can take years before payback is reached there is currently a preference to develop shale drilling instead, which is much quicker and cheaper to set up. But shale wells tend to be very short-lived with a low oil content. The IEA warns in its report that shale cannot meet future demand on its own without more investment in conventional drilling. US shale still only accounts for around 5 mill barrels per day compared with conventional oil production of 69 mill barrels per day.

Whilst both these reports point to longer term trends and situations, the fact that they appear after the market has been falling for some days and sitting on heavy support levels , not surprisingly, has an affect…

I guess today will be focusing on the US Oil rig count, which has been consistently increasing week by week.

Personally, I am again today only going to watch the 15m chart v. the 1H. This has been a reliable short term trade chart recently and performs well at present. This has been a good and consistent month and I am not risking anything much today, being the last trading day of April. Besides, today may turn out to be short range see-saw, rather than anything dramatically one way or the other.

Geopoliticals are also an ongoing factor with the ever- increasing global focus on the US-China-North Korea situation. Whilst a local flare-up on the Korean peninsula would not be overly or directly significant from an oil perspective, it is totally clear that any military flare-up here would not be contained to a local area at all. Japan and Sth Korea would be immediately involved and China would not continue on the sidelines just asking everyone to calm down…and Russia?

But I have a deep personal aversion to talking about human conflict and suffering in terms of speculative price action, so enough said about that!

[anon46773462]

So it has been a very quiet day and a quiet end to a nondescript week if one looks at the Daily bars open/close ranges.

We are still living above that tenacious 200sma and every drop below it seems to meet with buying very quickly. We had a bounce right off the uptrend line. With only an hour left for the week it would seem we will close around here right on the 200sma.

The 15m chart was the only one to offer anything today and I only got one short trade out of it - but a pleasing end to a reasonable month.

The US oil rig count was slightly higher than expected, and a Reuters report collated opinions suggesting that oil stocks should be in balance by the year-end, if the OPEC deal is extended. I guess there was little appetite for more than position dressing today, being a long weekend for many as well as a month-end.

[MikeWolski]

Hey Manxx!

I just love reading your thread. Good job!!

I was just wondering, and since your such the thinker. Have you thought about, or do you even acknowledge, the correlation that oil has with some of the currencies? I would think maybe the CAD/JPY.
I mean, I don’t know if you even pay attention to whether one affects the other (oil - currencies, currencies - oil). This was just a thought of mine. And I just wanted to know your thoughts on that.
Hey, I would be perfectly happy just reading the way you look at it. And that seems to be all on it’s own.
Was just curious.
Check this out.
Commodity Correlation - 3 Key Correlations You Must Learn

Thanks Manxx.
Keep up the good work.
I’m with you.

Mike

[anon46773462]

Hi Mike!

Good questions!

I haven’t actually spent a lot of time studying this correlation issue and petrocurrencies, but I am sure that oil prices do indeed have a range of effects on practically all economies and currencies in various ways and to various extents!

I guess the two main reasons for this are that a) oil is almost always priced in US dollars (or nowadays Euros, too), which means there is usually some kind of large-scale foreign exchange transactions involved in oil deals, and b) oil demand for most countries is both large, critically important and relatively inelastic (at least in the near term) regardless of oil price changes.

The most obvious impacts are on the major oil exporting countries and oil importing countries since the size of the oil industries in these countries is always significant - and especially when oil exports/imports are a high percentage of total exports/imports. An increase in oil prices will create an increased inflow of currency to oil producers which, when exchanged into the domestic currency will create an upwards pressure on it. Similarly, importing countries have to pay more US dollars for their oil and therefore sell more domestic currency to do so.

Apart from this direct impact of foreign exchange through the oil transactions themselves, there is also a general boost from oil price rises to the economies of producer countries in the form of extra tax revenues, employment, additional investment programmes, overflow into related sub-contractors and service industries, etc.

But I guess there is also a contra effect as well in that when a domestic currency strengthens it will also increase the price of exports to other countries and will reduce competitivity.

However…

Having said all that, I do not think that the correlation between oil prices and currencies is realistic enough to use as a basis for trading decisions - at least not on our kind of time frames. Oil is only one factor affecting any particular country and there are, of course, many more factors that will have a greater or lesser impact at any given time.

By way of example, as you mention, one currency pair that should clearly show this correlation would be CADJPY since Canada is a significant oil producer and exporter whereas Japan is a big importer. So I thought I would put up a daily chart for each of these side by side. Here it is, since Jan this year, with USOil on the left and CADJPY on the right. Unless I have done something very wrong here, I don’t see any correlation at all!

In the meantime, May Day is a big celebration and public holiday here, and since it has been a brilliantly hot and sunny day, we’ve been more concerned with a hike in the forest and grilling sausages - even if the lakes are still frozen and the last remnants of the winter’s snow still stubbornly visible

[anon46773462]

The pumpjack is probably the component that most readily comes to mind when one thinks of the on-shore oil fields, so I thought it would be interesting to take a closer look at what it does and how it works. The pumpjack is known by many names of which “nodding donkey” and “grasshopper” are but two.

The pump jack is used to extract crude oil from the oil well whenever there is not enough pressure in the well to naturally force the oil to the surface. The pump jack mechanically extracts the oil via a pair of valves in a pump at the bottom of the oil well. These valves alternately open and close in a similar fashion to the piston valves in a car engine.

The long, heavy beam, is called the walking beam and is pivoted on an A frame. It is connected at one end to a power source, such as an electric motor, which rotates the crank and counterweight. This rotary motion is converted to a vertical reciprocating motion via the walking beam, which causes the end of the beam to rise and fall and produces the “nodding” motion. On the other end of the beam is a curved metal box called a horse head or donkey head. Steel cables, called a bridle, follow the curve of the horse head as it lowers and raises and thereby creates a vertical or nearly-vertical stroke.

The bridle is connected to a polished rod that passes through the so-called stuffing box. This is such a close seal that the stuffing box lets the rod move up and down without any fluid escaping. The polished rod is connected to a long string of rods called sucker rods, which run through the tubing to the pump at the bottom of the well.

This pump has two ball-check valves: a stationary valve at the bottom called the standing valve, and another valve on the piston connected to the bottom of the sucker rods that travel up and down. This valve is called the traveling valve.

When the rods start to travel up, the traveling valve is closed and the standing valve is opened (through reduced pressure) so that the fluids can enter into the bottom of the borehole through perforations that have been made through the casing and cement.

When the rods begin pushing down, the traveling valve opens and the standing valve closes (through increased pressure). The fluids now inside the casing are pushed up through the open traveling valve. When the piston then reaches the bottom of the well, it again begins its upwards path, closes the traveling valve and carries the fluid which is now above the piston up to the surface.

And if you are not already in love with Crude Oil and the nodding donkeys then here is your heart-stopper:

[anon46773462]

We saw a strong continuation of the drop in oil prices yesterday after having initially broken the daily 200 sma on both Friday and Monday over the partial May Day holiday extended weekend.

As far as I can find out the drop yesterday started as hedge fund and money managers began seriously closing out long positions after prices dipped below last week’s lows. Apparently, over 50,000 US contracts traded within five minutes.

The tone was already in a negative state following the further increase in the U.S. rig count last Friday, indicating that U.S. oil production could even exceed levels last seen in 1970, and increasing convictions that the excessive global oil inventories are not reducing anything like OPEC intended with its production cut agreement.

There is also growing skepticism that even though OPEC/NOPEC will agree to extend the cuts until the year end in its meeting in a few weeks time, it still may not reduce inventories sufficiently to cause prices to increase noticeably. Also, there are doubts whether OPEC will be able to continue to maintain such a high level of compliance with the agreement amongst its members during the second half of the year.

Once yesterday’s fall had put in what turned out to be the low for the day, this week’s API report was released showing a significant draw of 4.2 mill barrels in United States crude oil inventories, compared to analyst expectations of a 2.2 mill barrels draw. This caused some small rebound in price and maybe saved the price dropping to new lows for the year.

Gasoline inventories also fell by 1.9 mill barrels, according to the API, compared with the analysts’ prediction of a 1 mill build in gasoline stocks. But this, again, did not result in a significant price rise - afterall, recent EIA, gasoline statistics have shown an increase in gasoline inventories of nearly 5 mill barrels in the last few weeks.

Today, we have the EIA’s version of the weekly crude oil and gasoline inventories, which can often deviate from the figures previously reported by the API…

Here is the Hourly chart showing the action around the 200sma before and after the weekend, and the breakdown yesterday.

[anon46773462]

The EIA Summary of Weekly Petroleum Data for the Week Ending April 28, 2017 showed U.S. commercial crude oil inventories only decreased by 0.9 mill barrels from the previous week compared with the anticipated drop of around 2 mill barrels. At 527.8 million barrels, U.S. crude oil inventories are near the upper limit of the average range for this time of year. Total motor gasoline inventories increased by 0.2 million barrels last week, and are also near the upper limit of the average range.

U.S. crude oil imports averaged about 8.3 million barrels per day last week, which is down by 648,000 barrels per day from the previous week. But over the last four weeks, crude oil imports averaged over 8.2 million barrels per day, which is 4.9% above the same four-week period last year.

Prices initially dropped on the news of a smaller than expected draw in crude oil inventories but quickly stalled and returned almost to the same levels prior to the release before drifting off lower again.

Whilst there is still no sign yet of significant drawdowns in the US crude stocks, I can’t help feeling there is some overall sense of value at these levels that may well support the market at least until the OPEC talks in Vienna at the end of the month. We are very close the lows that were reached in March after the initial rally at the start of the OPEC cuts. Will these lows hold again or are there grounds for even lower prices. The charts are naturally still very negative across the board and there is no rush to buy into this, on the contrary, there is still a serious vulnerability for further drops from here in the near term. This is surely not yet the time to try and pick the lows unless one is looking at a much longer timeframe towards the year-end and beyond.

In the longer term there is still an expected pick-up in demand globally and an estimated deficiency in supply due to the present lack of investment in new conventional drillings and exploration, both of which have a considerable lag time before they become productive. US shale alone is not the answer to these future imbalances.

I have been trading from the short side so far, but I am now becoming a bit dubious about the possible additional potential on the downside from here…The Daily chart is still very negative but we are close to those earlier lows here and that makes me cautious of the risk of a quick rebound from somewhere around these lower $47 levels (WTI), but on the other hand…

[anon46773462]

Not really anything new to add here. We have visited the lows from March and so far holding. The charts are all looking horribly negative, but I am still reluctant to get in here any more on the short side - but I am certainly not in the mood to buy anything either - not yet anyway!

So its time to look at something else to do with oil. maybe a closer look at OPEC, what it is and what it does…or maybe why does a whole barrel of oil (about 159 litres) cost only $1.47 whilst just one litre of gasoline in town costs almost the same!

Daily chart - nothing very new here: