Commodities Corner: Black Gold Bounces, Why?

Trading desks are a buzz overnight as black gold put in a near five percent intraday reversal yesterday. In this week’s update I wanted to share some insight into how the news flow on professional trading desks is used to frame market moves.

Less experienced traders believe that the dealing desks at the largest banks have some type of informational advantage that allows them to have an intimate understanding of every zig or zag in the market, that gives them a definitive trading advantage. Now clearly these desk do have an advantageous view of the market but to deem them omniscient is a stretch target at best.

Lets take a look at what some of the trading desks attributed this bounce in crude to and compare the news view to the technical picture and asses which is the more reliable read.

US Tier One Interbank Dealer

However, on the surface, the move looks overdone given this specific news. Keep in mind that it’s month end, FOMC day, and we also have DoE inventory data ahead at 10:30 EST/15:30 London time. Lot’s of risk, room for abrupt price action.  Keeping within commodities, gold has had an impressive day all session – up from the 1165 area towards 1183′

European Tier One Interbank Dealer

The weaker $ seems to be the most reasonable point for the strength in crude oil. The commodities in general have been strong ahead of the Fed meeting where some speculation that any rate hike will be pushed further to the right. The inventory number disclosed little news with the exception that imports were near nil and refining utilization rates edge higher by 1%. So again, the move seems more attributable to the thought that the Fed remains on pause in terms of raising interest rates. For those that are looking at the HESS capex comments as bullish for front month is seems flawed.

I suspect a lot of this move is position unwinding. Our estimates for what levels would cause CTAs to buy were 48.86 for Brent and 43.2 for WTI which have both been surpassed. Our signals for Oil are around -80% for both carry and momentum. The curve is still very much in contango, particularly relative to history, which suggests there is still a glut in oil. A long position in WTI is currently carrying at -22% per year…

Asian Tier One Investment Bank

‘We have had number of queries on the oil move overnight. Crude Oil Futures jumped near 5% and some linked this to the announcement by Pemex. Mexico’s state-owned company said it had received permission from the USD to import as much as 75,000 barrels a day of high-quality “light” crude starting this month. Our oil specialist Katherine Spector disagreed saying this talks were ongoing and nothing new. The move in oil is purely short covering. In fact there was also a speculation that Saudi, Kuwait and Russians are holding talks but no one can confirm this

Where Price Leads News Follows

As you can see from the snapshots of flashes that these trading desks issued to clients during yesterdays spike in prices. No one desk has a definitive view and certainly no desk issued these flashes in advance of the move and as commented above the move was mainly attributed to short covering, what is interesting from a  flow perspective is how the desks identify stop levels that ultimately act as an accelerent during the move. But none of this information is in and of itself either tradeable at the point the move is taking place or preemptive for that matter.

Now lets take a look at the technical picture and see if that framework can offer better clues. One of my favourite technical tools for framing price action is the Andrews Pitchfork, the advantage of this tool is that it has both predictive and preemptive qualities, while giving an excellent framework for probable paths of price.

In the chart below you can see that by connecting the three most recent price pivots. The prior low printed in March and the high printed in April with the most recent low we are able to identify a potential support zone based on the scale of the recent moves.

2015-10-29 11_10_06-

With the Andrews pitchfork now framing the recent price action we track the lower parallel as a potential point of support, as we track forward price rotates sideways before dropping to test the lower parallel where support emerges and price makes a sharp reversal. This is an example of where the news follows the price action, as price rebounds from the lower parallel trading desks scramble for news flow to frame the move, when realistically there is a far simpler explanation.

2015-10-29 11_14_27-

Now from a trading perspective I certainly don’t advocate playing the touches of the parallel as a successful trading strategy but I certainly counsel watching these levels and when price responds it is worth watching any retest and or congestion following a reaction for trading opportunities. The logical objective for a long trade from the lower parallel is the median line of the pitchfork and technical studies suggest that once price has successfully tested and retested the lower parallel there is just over a 70% chance that price will move to test the median line of the parallel.

  • So while $42.70 support is maintained on a closing basis, crude could see a correction to test the median point of the pitchfork toward the $60.00 level. This $60.00 level is an interesting target as it is the midpoint that most global oil producers are using for earnings forecasts for 2016/17