Crude Oil and oil markets

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! :slight_smile:

stockpile

2 Likes

Lots of talk about reduced capex from shale companies in 2018, but rig counts just kept going higher. If true, there may not be any major increases in production from the US in 2019 BUT with a perceived slowdown in global demand it might take a while for prices to turn bullish again.

I think we saw some shorts liquidating their positions a few days ago with the slightly rally but there was no follow through perhaps because of the bearish API report and weaker than expected EIA report. Everyone seems to be following inventories these days.

1 Like

Thanks for the post @Gilas :slight_smile:

And a lack of pipeline capacity is currently another restrictive factor on growth in the US, I believe.

A DIFFERENT KIND OF BARREL…

From the BBC a few days back:

Frenchman Jean-Jacques Savin, 71, set off from El Hierro in Spain’s Canary Islands to cross the Atlantic Ocean in this barrel-shaped orange capsule, using only the ocean currents to propel him. He believes they will carry his resin-coated plywood vessel about 4,500km to the Caribbean and aims to arrive there in about three months.

His barrel is 3m long and 2.10m wide with six square metres of living space providing a sleeping bunk, kitchen and storage. A solar panel generates power for communications and GPS positioning.

Wishing him the best of luck and may the ocean current trends be his friend! :smiley::+1:

1 Like

Manxx, good posts and all that’s more than my brain cells can handle. And yes you want to be up on all that for long and longer term trading. We are talking apples to watermelons here. I am basically a day trader with 10-25 pip targets. I do not have the equality balance to trade a month or longer. In this current state of short volatility just going 24-48 hours is hazardous in my opinion.

Thank you for the oil insight,

@midwest My trades last on average just 6.7 hours. Most of the time it’s less. Still, it helps to have long trade ideas even if we trade them on a short term basis, just wait for technicals to give appropriate signals and cut when wrong.

Thx Gilas, do you find a best time of day to enter an oil trade?

When both West Texas and Brent Crude are open. I try not to trade when only West Texas is open. Typically I would trade oil beginning an hour before London opens, all the way until the US session. I avoid trading oil during the Asian session.

Most of my trades are also day trades, or 2 days at most. I have been trying to move to longer term positions but that has already been for about two years now, so I have more or less resigned myself to keep on with the short-term stuff! My plan was to use different brokers for the short v. long term trades but I haven’t really got that organised properly yet…(another New Year’s resolution in the making? :slight_smile: )

This is a very sensible approach, in my opinion. I always refer to the daily charts even for short term. It just gives an overall background perspective to where the market is. There is no reason why one cannot be a short-term day trader off daily charts combined with a shorter TF for selecting levels and timing entries/exits.

Oil has been a harbinger of risk in recent times, often you will see XLE lead the pack on an up or down day on the S&P

On shorter time frames sometimes it’s possible to get a sense of probable turns in risk using the bond market.

Dec 26 - light market, wti making little headway from pre-Christmas low - then suddenly up against recent trend.

WTI_HR1

Now check the USB10yr - same times blue lined:

And of course if you were to blue line the US2000 (small caps index, good risk indicator) on the same time frame the same result:

When you look at this last chart there is a sense that risk might continue to be on (tweets aside) in the early days of new year.

1 Like

Oil is a commodity which is sensitive to a whole range of issues. I guess whether it is leader or follower of trends depends on which part of the supply -demand equation is in question.

The recent price movements in oil seem to be following the direction dictated by the global indices as they react to predictions concerning global trade trends.

But during the run up to the US oil sanctions imposed on Iran and then the subsequent waivers, oil was reacting primarily to perceptions of supply shortages, then to ramped up production by Saudi Arabia and others to compensate, and then to the prospect of a glut in oil once the waivers were announced.

Crude oil, being a physical commodity, has a whole range of factors that weigh in on its price at any time and it is not always clear which are the dominating issues. But that is what makes it so interesting to trade and what guarantees there is always something going on in the world of Crude. :slight_smile:

1 Like

According to my events calendar, this week’s API Crude Oil stocks release (for week ending 28.12.) is on Thurs 3.1. and the EIA Inventories data is released on Friday 4.1. as well as the weekly BH rig count.

I didn’t see any especially relevant concrete news over the weekend, but I did read somewhere that Mr Trump had commented on favourable progress being made with China regarding trade talks. Maybe that explains why we are slightly up this morning in both Oil and S&P.

Regarding Canada’s oil transportation problems, the National Energy Board reported that Western Canada is producing 365,000 bpd more crude oil that current pipeline capacity can handle. In order to resolve this, additional oil train capacity is being arranged together with compulsory production cuts as from January totaling 325,000 bpd until the excess oil in storage is cleared. This is estimated to take no more than three months.

oil train

1 Like

As one year ends and a new one begins. Best wishes to everyone for a:

3 Likes

Yesterday saw a weak range, as was anticipated by the entire world and its dog. Even the Reuters report about Mr Trump tweeting a claim about progress on a possible US-China trade deal did little to raise prices, which later drifted off into a doze, sandwiched as it was between a post-Christmas weekend and New Year’s Day.

So we saw a TA dominated day, so typical of thin markets, featuring price-visits to last Friday’s close and a climb up to sniff around the 1-hour 200SMA - and that was it really - for now. The market is still overshadowed by that overlaid grey daily cloud.

But year-ends are also a time for reflections and I thought this was an interesting chart. It is a monthly WTI chart covering the whole of this millennium so far. Unless someone is a really long-term trader then this is of no relevance from a trading perspective, but it does demonstrate that this low $40’s is a strong area for bottoming out and I am sure it reflects the reality of what is the minimum price zone for the oil industry to function healthily and continually. The PA on such a long term chart is also very interesting - and as well as demonstrating the potential for very big and long moves in this commodity.

But this covers 18 years - not the typical trader horizon! :slight_smile: but interesting nevertheless:

1 Like

Looks like a descending triangle to me…oil will breakdown in 5-10 years LOL

But maybe not worth taking a short position just yet! :sweat_smile: …on the other hand…:thinking::wink:

Actually, in the wider scale of things, that line is descending quite rapidly and $70 is not so far away. We could easily see a retest of that down line even during this year.

I think you are right about the longer term future for oil. Alternative energy sources, environmental issues, advances in oil retrieval technologies, restrained production capabilities, unlimited reserves, all point to an end of expensive oil…

With the exception, that is, if we end up with another widespread global war. And that is not so far-fetched with a global population heading towards 9 bill, all of whom want the same lifestyle as that enjoyed by about 10% of the population. And a geographic globe being dramatically transformed by climate change (from whatever causes) resulting in huge migrations of people from continent to continent. The rich get greedier and more defensive whilst the poor get more desperate…

drought

BUT until Saudi Aramco does its IPO, and alternative energy isn’t quite there yet…I’m fairly bullish for 2019. Nowhere near $100/barrel though, but probably somewhere around $70 I think.

In spite of efforts by OPEC+ to stabilise oil prices I think the key factor affecting price levels in 2019 will be global trade (and monitoring the share indices). In particular the final results of both the US/China trade talks and Brexit.

Both the US and China, as well as Europe and the UK, all want beneficial trading agreements and environments, so it is going to happen. It is just a question of who gets the best deals - but there is little doubt that there will be deals! :slight_smile: For that reason, I am also geared towards 50-65 dollar range for WTI in 2019.

But I think it is capped there by the number of producers who are currently reluctantly holding back on their production (OPEC+ in particular, Venezuela due to structural/economic problems, Libya’s internal power struggles, etc) who will be only too willing to open the valves wide as soon as prices rise as we saw when the US imposed the Iran sanctions/waivers. The impact on prices was almost instantaneous. Protecting market share will also drive producers like Iraq etc to ramp up production the instant that it is allowed.

I doubt the Aramco IPO will happen at these price levels, if at all. The latest comments seem to suggest that it is drifting away. But SA needs a lot of capital to carry out its diversification plans for its economies, and it has to find the capital from somewhere…

It may seem that alternative energy is still in its infancy but it is growing fast, as is natural gas as well. But the major changes are surely in the automotive field where the combustion engine is becoming extremely efficient, owners are being coaxed towards vehicles with smaller consumptions, improvements in public transport, enlightenment on environmental issues and the public conscience, and the huge drive towards hybrids and all-electric EVs - in particular, in the massive automotive consumer countries like China.

If we look at how much of crude oil is actually refined into gasoline and distillates (diesel) then it is easy to see how quickly any major change in vehicle characteristics and driving habits can impact on crude oil demand in the near future (“near” meaning maybe 10 years!):

crude oil refining

2 Likes

Yes, the Saudi Aramco IPO looks doubtful with low oil prices. But Saudi has to do something lest MBS’ grand plan to pivot fails and he loses credibility. I suspect Saudi will do everything and anything it can to push prices up (with limited chances of success) and get that IPO out this year.

The large automobile manufacturers have realized that Tesla has gotten the jump on them and will look to producing more electric vehicles. However, raw material constraints will make it difficult to source and produce batteries in sufficient quantities for now. But with pronouncements from countries like China setting goals for EV use in the future, Saudi has to realize the longer they postpone the IPO the more difficult it will be for them to get good prices. Seems to me like they’ll just push and try to get the best price they can, while they can.

Re natural gas, the pivot of Qatar to natural gas is quite interesting. Maybe they know something, eh?

The deals by the US with Canada and Mexico are instructive I think on how the US will do other deals with Europe, Japan, China, etc. Trump’s going to do a deal, after much hullabaloo. He has to, in order to not be seen as being a poor negotiator, and to shore up some popularity after all the booboos he’s pulled. Read an article about the CPTPP that’s going to result in much less demand for US agricultural products from other G6 countries (soy, wheat, etc), that and a lack of a deal with China is going to destroy US agriculture.

Interesting to discuss fundamentals with you @anon46773462. Cheers!

1 Like

Cheers to you for sharing and making this thread more interesting! :+1:

Its going to be an interesting year!

1 Like