Commodities Corner: Charting A Crude Comeback

Crude is the comeback kid of the Commodities space right now. In this weeks segment I want to take a closer look at the fundamental and technical drivers at play.

Plotting The Fundamentals

Lets start by reviewing the fundamental picture. You will recall in my introductory Commodities Corner piece that the best cure for ‘low prices, is more low prices‘ Well it appears that the age old adage is playing out currently in the Oil sector. As price declines, we eventually reach an equilibrium where demand sets in. This dynamic is particularly relevant to the commodities space where aside from futures contract speculation physical demand is the greatest driver of prices.

It would appear that the sharp declines in Crude prices witnessed  this year are finally starting to stimulate the demand side of the equation. The US and China are the geographies where the heavily discounted prices should most likely convert to increases in demand. One of the principal drivers in the last leg of the Crude collapse sub $40.00 was the panic that emerged late summer regarding growth prospects in China which had an immediate read through to commodities demand specifically oil. Demand for industrial commodities in China has significantly lowered, but it is important to understand that oil demand in China is predominantly consumer driven. The Chinese consumer is not immediately impacted by lower industrial production and investment.

It is also noteworthy that Chinese import demand has been moving in the opposite direction to the Crude prices, since the price plunge Chinese imports have demonstrated a growth of circa ten percent year over year. This import demand is further underpinned with the domestic currency peg to the USD protecting purchasing power. China is somewhat unique in this respect as many of it emerging market counterparts are unable to shield themselves from the USD surge.

Another factor to consider is Iran. Since the agreement in July, the uncertainty surrounding implementation and execution of the agreement and the implications of removing sanctions has eased somewhat. The market is now broadly aligned behind the notion that sanctions will be removed in the first quarter of 2016. Iran has stated that it will be able to increase production by 1 million barrels per day. At the height of the crude collapse the market was effectively mispricing the Iran input to the equation as there were overriding concerns that sanctions would be lifted.

Finally returning to the US we note that the US shale industry contra to popular belief is, in fact, suitable to price concerns. As rig counts were heavily reduced early in the year, they were increased in the late spring inline with the pop in the crude price. After the later summer swoon, rig counts were once again reduced. For the most part production trends in the US were heavily impacted by the rig count however since late summer production due to decreased rig counts has declined more significantly according to DOE data. The data demonstrates two months of decline that will impact shale oil near term.

The read through from these factors is that in the near term we could well see a further push higher in the crude market. Lets take a look at the technical factors and identify some potential trading locations to take advantage of the move.

Technical Tactics

Below is the daily scale chart that we have been tracking with our two probable price paths marked.

crude2015-10-07 15_42_27-

From a technical perspective for now we have negated the downside break of the consolidation pattern and as such we now look to the equality upside target as the primary objective of this advance.

cl2015-10-07 15_47_33-

Ideally we would like to see a snap back to test the topside of the consolidation zone broken resistance to serve as support. While this 47.00 level hold there is the potential for price to reverse and advance  towards the 55.00 equality objective and the upper trend line resistance at 57.00 as the extension objective for this leg.

Trading Take Away

  • Monitor intraday reversal patterns at a retest of 47.00 to position long leaning against the 45.00 pivot targeting 55.00 initially and 57.00 in extension.
  • No reversal signal at 47.00 would suggest a false upside break and return to range