This is a sample entry from Andrew Pawielski’s email newsletter, Market Dimensions Advisory, published on November 25, 2015.
With WTI Jan Crude oil failing to hit $50, November 2nd at $49.23 and November 3rd at $49.18, that rejection has created a steady descent, following the over downward trend of WTI Crude. This downward trend and new oil price environment is based on the over-supply concerns and perhaps a down tick in world growth for 2016. From a short term technical standpoint in the recent weeks, the bears have their eye on one target – taking out the August 24th low of $39.97 (Chinese stock market selloff). I think bulls are eyeing the same prices and waiting for new lows to trigger before putting on the bullish buy entries.
The Jan WTI contract has established pricing lows for 14 days in a row. With 8 of those days hovered around the $41 price, we have not had the downward momentum to break into the $30 range. We even saw the USD index break above Par with a high of $100.065, but WTI was only able to make a low of $40.41. A stronger dollar can create a bearish commodity market environment, and many of the commodities are down and depressed. We haven’t seen the dollar this high since March 2015, and that was an all-time high from the Euro collapse. Why a strong dollar? Suggestions may be from a December interest rate hike and a safe haven due to European terrorist threats.
Here are some questions I have for this current market. Why the recent uptick in Crude? Is this just a small but needed correction in an oversold contract? Has a stronger dollar been ruled out for oil going lower? Are prices factored in already? Is the correlation between stocks and energies beginning to deviate? As we have noticed recently in November and the last several months, we see stocks and WTI playing a little of follow the leader. What will happen if we raise rates and get a selloff in stocks? Will oil tag along?
In terms of bullish news this week that has us $3 off the lows, here is what we know. Saudi Arabia has agreed to work with OPEC and non-OPEC members to attempt to stabilize the oil market. We will wait to see if this holds up or what they actually mean. However, this is bullish for WTI or at least supportive that they do not want us trading into the $30 prices and will do what they can to keep crude above $40. We are also seeing fear premium showing its face back into the market place just as we saw on Nov 24th that a Russian fighter jet was shot down by Turkey near the Syrian border. With Putin involved, many believe he will retaliate. With tensions already at extreme highs in this region and the world on high alert from the recent terrorist attacks and threats, this could be the tipping point to go from bad to worse. With all of these countries connected to oil and oil production, it could create a story for short term oil prices to move higher and quickly. Also, you have to think that this could just be the start of the fear premium geo-political pops. Often, these geo-political news events will have quick knee jerk reactions and then the markets will rebalance, leaving people on the sidelines who then get back in. It is hard to say for a fact, but this feels different than other fear premiums we have experienced in the last few years. Yet, with so much supply on hand, will any of this matter?
All in all, this is what I am seeing. We have a fundamentally oversupplied crude market with the momentum and writing on the wall to make new lows into the $30 a barrel price range. The major support for this is a looming December Fed rate hike. A rate hike, if not already priced into the crude market, could have what is currently a strong dollar ultimately become even stronger, and consequently will put more bearish pressure on commodities. A rate hike could also simultaneously cause a selloff in the US Stock market which we have seen correlated with crude oil and could increase more pressure on oil to make new lows. The major thorn in the bears’ side right now is the geo-political fear premiums entering the marketplace, which is an unknown to all. This throws caution to the wind and could support the short term bulls. It is also coming at a time when everybody is recommending to sell, which has me thinking that we could catch many late short sellers off guard with one quick pop higher. This quick leg higher I think could activate quick emotional position covering “buy stops triggering” out of positions . The question is “how high will we pop?” before selling off again. Do we get in now long or short? Maybe take some heat on the trade?
If we do go lower, will crude prices last? We will have to revisit that question as we enter December and see how things escalate overseas. I do think we will have some volatility and a few supportive days after we initially break into the 30s. If current supplies continue to be produced then yes we will go lower. However, there is an idea that at these lower prices, producers will no longer be able to afford to pump, and that we will eventually fill all existing storage. If this is the case, we will most likely see the supply/demand relationship begin to even out. This process may have already started as rig counts are down tremendously in 2015 and likely to continue into 2016. From what it feels like, I do think we will range between high $30s and low $40s in crude.
For those traders who work with me at Daniels Trading I have put together a game plan on the WTI market. I am using some of the mentioned fundamentals overlaid with my technical levels and indicators. If you are interested in discussing these ideas, do not hesitate to reach out to me directly. I have both short term and long term setups that make use of futures, options and spreads on our dt Pro platform.
Although I do work with many oil speculators, oil producers and hedgers with risk exposure to the energy markets, it is never too late to begin studying and following along with the energy market and it’s correlating markets.
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