Today I will be touching a different territory. I would like to discuss Oil which is a commodity market. We mainly focus on trading FX here at Platinum, but that doesn’t mean we don’t look at other markets too. We do trade commodities, indices, FX, etc. As I like to say, I trade anything that moves.
Oil Crush begins in 2014
If you look at the chart of Crude Oil, it is no secret that it started a descending path in June 2014 when it was trading at $107.50 a barrel and it needed only 6 months to hit $47 a barrel in December of the same year. At the time everyone thought Crude had probably hit rock bottom, but we just needed to start the new year, 2015, to find out that it wasn’t the end of it for this market.
After enjoying a rally in the first 5 months of 2015, the “June” effect hit Crude Oil again and this time all it needed was, guess what? 6 months again for Oil to hit $30 a barrel. It was the end of the world for Oil, or was it? At beginning of 2016, the same history was repeated. Oil rallied and this time it looks like we have hit rock bottom, at least for the time being, and for 6 months the market enjoyed a free ride. But there comes the “June” effect again.
Crude Oil hit resistance at $51 at the beginning of the June 2016 and sold off to $39.00 a barrel and it needed 2 months only to do that. Do you get where I am going with this? Should I remind you what month we are at now? Any particular reason why I am writing this article right now and not in August or October?
Welcome to the world of seasonal trading
You do not learn this kind of fx trading platforms anywhere else. Mainly because the people who are teaching you somewhere else are not traders. They didn’t even learn to trade like that. Here at Platinum that’s what we do. Every single day!
But then, you ask me: But why does Oil sell-off in June?
My answer to you is another question. Do you want to understand in detail how the microwave works or you want it to serve its purpose and heat your food or drink? There may be a lot of factors why that happens, but to be honest I don’t want to reinvent the wheel. If I observe in the charts that a market sell-off every year in a particular month, I just position myself to enjoy that flow too.
All I want is to get in at the best possible price in the market and go with the flow. If that means selling Oil in June, so be it. But I guess you do deserve a bit more of an explanation about the subject. I will not tell you how the microwave works though. You will have to research on that yourself.
What is going on with Crude Oil?
We need to understand what is fundamentally happening with Oil. So, let’s try to learn how that “microwave” works.
Understanding US APR.
As a trader, you may have heard at some point of SPR or Strategic Petroleum Reserves. What on earth is that? You ask. Well, to make it simple to understand, it is the emergency stockpile of Crude Oil in the US. Just something for you to refer to in case of a crisis like supply crunch or any unexpected emergency like an attack or war. The US has the largest stockpile of Oil in the world. The reserve amount to an astonishing capacity of 727 million barrels (115,600,000 m3) which are stored in big underground salt caverns in Texas and Louisiana. The crude inventories hold mostly sour crude with high sulphur content which can be processed by the refineries in the US and is federally owned.
We must thank Gulf nations for SPR.
If we go back to the 1973 oil crisis, the Arab nations conspired to place an oil ban which froze out Oil from entering the US and Europe, destabilising Western economies. Thanks to that move, the Americans created the SPR to counter any such moves in the future. To put in simple terms, the SPR would be the insurance policy. When hurricane Katrina ravaged the Gulf of Mexico in 2005 affecting the domestic oil production, there was SPR to rely on. The same happened again in 1991 during Operation Desert Storm. If for any reason, the price of oil hits the skies, the SPR can also serve to ease the economy till the oil price stabilises.
What you read here as US “stockpiles” or “crude inventories” is nothing but the SPR. It has 90 days’ worth of oil which can be released during a crisis or emergency and allow ambulances and emergency services to still operate.
Why is it important to know that?
If you want to take that trade on Oil, you want to make sure the Fundamentals are aligned with the technicals to have the perfect edge. Currently, inventories in the US are climbing and climbing up to scale record highs. Analysts predicted a 2.8-million-barrel increase but with an increase of 5 million barrels in crude supplies, the stockpile stood at 533 million barrels in April, a level unseen since the cold war in 1982. There is no shortage of oil and the stockpile continues to rise. I need to emphasise here that 533.4 million barrels is a lot of Crude Oil even with the present demand and consumption levels.
US Oil production
A few years ago, there was a common idea among oil and gas analysts that if Oil prices fell below the $60 a barrel mark, it would suffocate the shale oil industry. Back then, the break-even price for shale oil production was around $70/barrel.
Today, the reality has proved to be the opposite.
Undoubtedly, Oil production in the US has risen from 8.45 million barrels per day to 9.1 million barrels per day. But what happened? Did shale extraction become cheaper in a short space of time? Well, the answer is yes it did. Fracking has become less expensive thanks to automation and innovation. Shale producers have learnt to manage productivity while saving costs.
In my opinion:
Domestic oil production is set to climb given current oil prices. Oil production should be breaking the high of the seventies very soon.
OPEC losing control
OPEC is losing it big time (you can change this title if you feel like it) Over past decades OPEC (Organization of the Petroleum Exporting Countries) has managed to manipulate energy prices through coordinated production cuts under the facade of “keeping price stability”. However, their significance in the world market has decreased rapidly, exceeding all estimates. What on earth happened? Well, OPEC’s control of oil supplies is a thing of the past due to many factors.
Normally, when OPEC wants to increase the price of oil, the “cartel” just asks its member countries to cut down production resulting, of course, in a spike in the Oil price and everyone associated with OPEC will have a laugh. However, the day came when OPEC struggled to get 50% compliance from members regarding supply cuts – except Saudi Arabia and Kuwait.
Then quietly on the sidelines, Russia, which isn’t a part of OPEC, overtook Saudi Arabia as the world’s number 1 oil producer. OPEC members inner trust irrevocably fell on the road.
OPEC was more than aware they were losing ground and rushed to cut deals. This year, 2017, OPEC and few non – OPEC producers settled to reduce production by 1.8 million barrels per day. The scene of OPEC sitting to bargain with Russia was a welcome sight.
We know how hard Russians can be at bargaining. I can’t imagine what OPEC may have offered in return to the Russians.
OPEC is in a tight spot.
The irony is that OPEC has only itself to blame. When the shale wave hit the US, OPEC faced serious insecurities. An easier way would have been to watch a nice movie eating some popcorn and concentrate on their business. But we are talking about OPEC here.
Robust Oil production
In the US is OPEC’s worst fear. They planned to bombard the shale oil boom in the US by flooding the world market with cheap oil, causing oil prices to drop to a level impractical for shale producers. Of course, there were consequences on the US shore. From job cuts to bankruptcies, the US felt it all. Oil went below the $30 mark and oil production slowed down too. What OPEC didn’t count on was the rebound and stabilisation that happened faster than expected. Many oil companies went down on winter mode so to speak. Others acquired struggling producers and got just bigger and stronger. Also, shale extraction got – relatively – cheaper with advances in automation technology.
As a result, the US will depend on even less on OPEC. Furthermore, crude production in the US is all set to grow by 360,000 bpd in 2017 and increase to 1 million bpd in 2018. That must have dropped a few jaws on OPEC.
In the end, OPEC is losing grasp of how oil prices behave.
When they announced production cut for the first six months of 2017, oil would have breached the $80 mark under 2014 market circumstances – but under 2017 market circumstances, oil prices barely reacted. If I have to be very honest, I was surprised a bit myself on how the market reacted to that announcement.
The initial cuts in early 2017 are losing steam and support. Financial markets see that and this is priced in. Crude oil prices now seem to trade as any other commodity, based on supply and demand. For 4 decades OPEC has managed to control the supply and prices but this is now over. OPEC has lost it big time indeed.
With OPEC no longer being able to influence on Oil Prices, the production of Oil around the world just increasing day by day, especially in the US where stocks are in all-time highs and not set to stop anytime soon, it looks like Oils prices have no argument to be going up in our charts. We could then say based on what we have just learned, that Crude Oil is Fundamentally Bearish.
As we can see from the chart, Crude Oil has presented a wonderful opportunity. We have broken a multi-year trending line and any Platinum Trader will have no doubts about what we should do here. We have a BPC (Break, Pull back and Continuation) trade which has now matured.
So what do we have in our favour to take this trade?
Fundamentally we are bearish on Crude Oil
Technically we have just broken a multi-year
Trending Line and have printed a fresh new low
We have confluence of Fib retracements with a supply level
We are approaching the month of June (Seasonal Trading – the “June” effect on Oil)
The Platinum Formula:
Perfect Fundamentals + Perfect Technical Analysis + Perfect Logic + Perfect Risk Management = Perfect Trade
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Hopefully, you have enjoyed today’s article. Thanks for reading! Have a fantastic day!
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