Commodities Corner: Black Gold Another Bearish Bounce ?

Monday saw some another sharpe intraday reversal in the Crude oil markets after retesting the $40.00 a barrel level intraday the market reversed rapidly on a market wire report that Saudis were suggesting support fro depressed prices.

Fundamental Flows

The kingdom of Saudi Arabia in the Middle East is the fourteenth largest country in the world with a land mass exceeding two million square kilometers, making it the second largest land mass member of  Organization of the Petroleum Exporting Countries, OPEC. Saudi Arabia is credited as retaining eighteen percent of the worlds proven petroleum reserves and it remains the largest producing nation in OPEC. Hence, when the Saudis make murmurings towards oil prices the markets take notice, as they did Monday.

The nature of Monday’s comments was essentially to do with Saudi Arabia suggesting in the strongest sense to date that they fully intend to work with OPEC and non OPEC oil producing nations to stabilise oil prices, these comments were attributed to the Saudi Oil Minister Ali al-Naimi.

The comments from Ali al-Naimi come against a backdrop of a supply glut in global crude prices, with reports suggesting that the supply glut is so extensive that currently there is a build of circa two point two million barrels at Cushing, Oklahoma the center for crude oil distribution and delivery of the Nymex Crude contract in the United States. Many market watchers believe that the over supply is currently running in excess of a million barrel nationally.

The Saudi statement hit the tape as crude was trading just shy of it two and a half month lows at $39.00 traders were skeptical of the authenticity of the headlines and once the knee jerk reaction was digested many saw the bounce as an opportunity to sell at better levels with crude actually ending down on the day although well off the intra day lows.

The lack of enthusiasm to take these comments as a genuine intention among one of the biggest players in the market to actively support prices is indicative of the broad bearish positioning in the market. Headlines like those released Monday, cause a rapid short covering but once the dust settles stronger hands reposition against the panic of weaker hands likely poorly positioned at less attractive entry points.

CFTC data as off last week demonstrates that bullish crude bets currently linger at the lowest levels seen since August. As of November 17 data Commodity Trading Advisers and Hedge funds speculating on the oil price were the highest net short, betting on a drop in oil prices, since the summer.

Tuesday saw some geopolitcal risk begin to price into the crude markets the shooting down of a Russian fighter jet by NATO member Turkey on the basis that the fighter illegally entered Turkish air space, the incident ignited geopolitical tensions, often a catalyst for a rise in crude prices as traders and consumers alike experience heighten concerns about supply routes and distribution channels.

Over the past four trading days oil has gained just over seven percent, creating increasing pain for the short-positioned oil market. It could be simple P&L considerations of oil trading accounts that clear the path for a short-covering oil rally ahead of the December 3 OPEC meeting. Markets may have reached a stage where a further rise in oil prices could feed into further price rises with the short-positioned market working as the catalyst. This is why a further escalation of geopolitical events has the potential to push USD lower. US data releases including the October PCE deflator, durable goods and the November Michigan Consumer Index may not develop the dominant market impact should oil rise again today.

Technical Take Aways

crude

From a technical perspective the near term line in the sand from a bull bear view is the $44.00 level you will see from the chart below this level denotes the extent of the last corrective swing price would need to close above this level before one could take a more constructive view on crude in the near term, currently crude is stalling at the AB=CD equality corrective swing from the lows. Note the emphasis on corrective, for now that is all we are witnessing is a short squeeze in a heavily short market. While the current corrective high is maintained I anticipate a retest of the cycle lows at $37.75 where I will reassess price patterns for a potential double bottom play.

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Open Commodities/FX Positions

As highlighted in last weeks report the AUDUSD price pattern I was mapping triggered a long entry at .7070 this position is now risk free and I am targeting an equality corrective objective towards .7500. Trade is currently running 180pips of open profit.

For updates on these set ups and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick