Yesterday saw a very weak close for WTI on the week, finishing more or less on or below the low and close prices for the previous week, just above $45. During the week, there have been clear signs of buying coming in whenever we drop below this level, but we are not yet seeing any follow-through once we reach towards $46. I cannot say whether this is just due to the buying interest being short term trading or is it a sign of a gradual accumulation of long positions at these “bargain” prices? Maybe a study of the futures curve contango v. backwardation may throw some light on that.
I will do a “Notepad” post on futures contango/backwardation this weekend, I need to understand that better when considering the longer term trends.
I have been seeing a few articles recently concerning the breakeven costs for shale, offshore and traditional drilling and they all seem to point to an average above $45 (meaning there are some operations with lower B/Es but not significantly so).
The key thought that struck me throughout these articles was that “these prices today are only good for today’s work” - in other words, it covers today’s running costs but does not cover the investment/costs for providing future oil for “tomorrow”. In even more words, this is saying that the long term continuity and health of the oil industry needs a higher price level.
My view of this is that if we consider demand as a constant then oil prices will firm to a more realistic level for the industry to meet its own investment needs as well as satisfying investors, but will be capped by rapidly increasing production in line with increasing price. Therefore, we may see a range of $50-65 if we exclude geopolitical events and outages.
However! - taking demand as a constant in this equation is precisely the problem right now and there is still considerable concern and uncertainty about world economic affairs. This, I am sure, will continue at least until there is progress in reconciling the US and China trade issues as well as the eventual solution to Brexit deal situation and its impact on the future of both European and UK trade.
On top of that, we also have the question of Iran and the US waivers to eight countries which expire in May and which, in practice, may tighten already in March. Venezuela is another major concern as are a number of smaller producers such as Libya, whose outputs are erratic due to domestic issues.
On a different matter, another e-mail popped into my mailbox today from Nial Fuller concerning the importance of time in trading,especially with longer term positions. I generally find a lot of sensible thoughts in his mails and this one matched perfectly with my New Year’s Resolution, posted above somewhere, to give my charts the time and space to “do their job”. I have long recognised that my own “problem” in trading is exiting too early and often missing the cream of a move. At first glance, this might not seem to be a big issue if one is making profits anyway and it is therefore “only” a matter of trying to make more - but, in fact, it is an extremely important issue in the long run.
As we all know, trading success is not about any one particular trade. It is about on-going consistent performance over a period of time. Therefore, the profits from some trades must be sufficient to cover the losses from other trades, as well as providing a profit size that makes it all worthwhile AND contributing to building one’s equity capital to increase one’s trading size and/or net worth. And if one is actually trading for a living then optimizing one’s trade profits is essential for obvious reasons.
I think this is a good read:
May 2019 be the year you stockpile your winnings, too!