Thursday, April 16, 2015

Where is crude heading? trading thoughts in a volatile market


Forget what the big banks are saying about crude prices. They have way too much interest in pushing or pulling the crude their way. On top of that, they are only seeing the front crude and adding or taking a few dollars, or in the worst case, they give a extremely wide range of prices, or a forecasted "average" which is a worthless piece of information. Look at the graph! what does it tell you? where are we going? what does your gut feeling says? do you think geopolitics are playing a big role in the near term? These are the questions you need to ask yourself, and even though, the answer is not 100% in one direction, you can build a story and scenarios and have your own opinion. This is what the big banks fail to tell you. but look at the Brent weekly graph first.

What is it telling you?

We are close to a decision point. As plain as that. At 60USD/bbl the upside is challenged aggressively, not a great deal of room since at 63USD/bbl we should hold. Of course, a close above that would target 65USD/bbl and after that, well... look at all the space, 70?, 75?, essentially, a decisive close above 63 is a buy opportunity.

But wait, what about selling this as we approach to the 63ish? and having a stop and reversal at 64?
The downside could easily be 55USD/bbl!!! That is a 7/2 (3,5)reward/risk ratio. I can use that.

If your fundamental story is leans towards a sound Iran deal, and a weak Chinese economy, and a tank top at Cushing, this is the trade for you. If your gut feeling is saying production from oil shale will soon show a steeper decline, no problems at Cushing, no sanctions lifted for Iran,  and Yemen+Russia+Isis tensions increasing, then you can wait for crude to gain a bit of steam, and then buy it on the break.

The message from this post is, in a nutshell, we are at a crossroad and we will be facing a great deal of volatility. Let's assume for a moment that the swing factor for the oil price is dominated by the weekly build/draw in Cushing. Every Wednesday, we are bound to see massive moves in oil prices then. The reason?

Producers can still drill wells, but will not be completing them if the price is not right. Once the price requirement is met, the completion can take place and production can increase almost instantaneously. In a way, if you have enough idle capacity to complete your wells, it may almost behave as storage volumes. So why not have a contango play on this volume?  John Kemp (analyst for Reuters) had a good article back in Feb (http://www.reuters.com/article/2015/02/20/crude-shale-wells-kemp-idUSL5N0VU2A720150220) basically listing the name of companies that were considering delaying completions (Anadarko, EOG, Apache, Continental resources, and more). Remember, completion of a well can be up to two thirds of the total cost of  a well, so it makes sense to delay completion if cash is needed now.

 ** I wrote this piece yesterday, and well, today we have a new world with Brent moving past 63. We have broken the reversal point however at 62,8 which means, we will confirm an uptrend very soon. I am getting more bullish than bearish. The recommended 63 sell is still in place, make sure you buy it back quickly. Do not stay short! .

With 15th april price move, we get an entry point for a  long position. The downside from 63USD/bbl is not 55USD/bbl anymore, that moves to 58.5USD/bbl (but will move up about 70cts per week).
Wait for a retracement and buy. That would be my preferred trade now. Take profit at 63,8USD/bbl, and repeat. Alternatively, you can take profit on part of your position and leave some to play a massive rally towards 70USD/bbl.

Good trading!