Oil Report: Break under $40 in the Cards

Oil Below $40 is Not As Unlikely as You Might Think

 

Turning Pont Analytics, a Technical firm covering global markets gives a lot of weight to the $40 level for support

“TPA has said that Crude’s low on 2/11/16 was probably the most important macro event in the past 12 months as it coincided with stocks rallying, a broadening of the market rally, a high yield rally, and a reduction in bond risk spreads,” Turning Point wrote in a new report. In addition to the $40 support level, Turning Point highlighted $52 resistance and $62 resistance as other technical levels to watch.

WTI: Volatile Day to Day, Not so much over last 2 months

Graph courtesy of TPA

One Possible Scenario for Oil this Fall

TPA is well respected and objective. Note they do not impose opinions on the  markets. To do that would imply bias and invite criticism. Good technicians are not prognosticators. They are handicappers. They analyze and report. It is the trader's job to form an opinion.

As traders of oil we have our own opinion, and it is entirely based on cash flows and the belief that Oil gravitates towards the price that causes the most pain.  Right now Oil can't seem to decide who it wants to punish more. For our own trades we use the VBS system almost exclusively.When we are looking technically for conformation or pushback one of our favorite technicians is Chigrl (that's her twitter handle) Money Manager, Oil trader, and master of the swing trade. Our words, not hers. We played interviewer and caught her in trading mode.  She wrote us the following answers.(emphasis ours)

 

The Refinery Seasonal Switch Over

SK: What do you think of this market? For our part, we think that the range TPA discusses is the broad boundaries of our own trading

CHIGRL:Def. everyone watching that 40-50 level as we been trading inside it for months  from a macro standpoint.

SK:What about in between those levels? what do you see?

CHIGRL:I'm looking for them to bid this back up next week and give a good level to short the market as we go into refinery maintenance season.That's the seasonal play on my radar. It's dependent on the actual builds during the maintenance shut down.The other factor influencing our pulling the trigger here  is USD strength. If that  continues it could force WTI under the $40 mark. So seasonally I'm looking to sell a rally depending on those factors: Builds during refinery maintenance, and rate chatter's affect on the USD as  either an inhibitor or accelerant on the trade. Finally, we'll be keeping an eye on import levels. If imports don't drop as domestic builds rise from refinery maintenance you have even more of a reason to not be long.could send oil a lot lower ...again USD strength will be a huge factor as well (rate hike/talk)

SK: So you are looking at a possible seasonal sale of WTI based on, refinery maintenance  builds, USD strength, and foreign Crude import levels?

CHIGRL:Yes, that is one trade at which we are looking

SK:What about the levels in your calculus to pull the trigger?

CHIGRL:"It's a mix, and has a lot of moving parts. Some of which we didn't discuss

SK:So no love on the answer key?

CHIGRL:Nope. Just know I could be long next week. Doesn't mean I'm not bearish.

SK: Bottom line is if you don't get your levels, you might see that as a reason to get long?

CHIGRL:Yes. Trading is not ideological. Getting married to ideas is a constant risk to us and we seek to minimize our own subjectivity as a result.

Good advice. Note she left out her technical levels to our chagrin.

We recommend following @chigrl aka Punter  on Twitter for Oil analysis and data

 

Our 2 cents

We think Oil will take a header when the Fed raises rates, possibly under $40. If a global crisis ensues after a Fed hike, then look for Oil to stay coupled with Stocks and rally post a QE event. This provided of course that under $40 every unhedged shale oil firm and its brother is pumping faster to service their debt.

From Before: Everything (stocks, bonds, metal, oil) is now very highly correlated. Gold has been historically very highly correlated to oil. If oil crashes everything is going with it, except (counter intuitively) gold. Then when Oil starts to reflect inflation and Dollar debasement instead of demand which there will be less of, it will be too late. Gold up, Oil and stocks down relative.

Some of our  Notes on Oil

  • Oil and Equities have been highly correlated for years. inveersely with Gold
  • The securitization of Oil has benefited liquidity greatly due to fund involvement and its past proclivity to trend.
  • Oil in the form of PetroDollars is a world currency.
  • Recently however, the market has become volatile and choppy in a wide range.
  • Much of this is owed to the push and pull of Global Monetary policies on traders that view Oil as a Risk asset.
  • Brexit Turkey, ISIS all have effects. One effect has been the delaying of Fundamentals of the actual product asserting themselves efficiently
  • Shale Oil has emerged as a threat to OPEC's dominance and had to be punished. Many Shale producers mothball below $50.00
  • Many more cannot make their loan payments below $40 as they look to produce more as the price drops to cover cash flow
  • To the extent that they're struggling with their debt burden, Energy companies are in need of higher price, if not actual demand
  • Hedge fund longs that rode the carry trade up to $100 have since blown out of their positions, most notable being former PhiBro trader Andy Hall
  • Add to that the OPEC infighting that will result in our opinion a kow towing to the Saudi's or a push by them to outrun cheaters like in 1999= $11.00

Related:

Sorenk@marketslant.com

Remember our community rules

2 comments sorted by

+1
-2
-1

Rureal (not verified)

0

points :

Feds not going to raise rates!
+1
-4
-1

Soren K.

0

points :

Read "Gold gets a treat." If rates aren't raised ,and that is possible, it will be off to the moon when world Qe kicks in.