Commodities Corner: Black Gold To Test $45/46

Commodities Corner: Black Gold To Test $45/46

WTI Crude traded above $40 for the first time since early December 2015, supported, in part, by a dovish Fed statement and headlines about the April meeting between OPEC/non-OPEC producers to freeze production.

Fundamental Flows

Last week at the AFPM conference, a major topic of discussion related to product stocks and gasoline’s ability to support refinery margins this year. US data indicate that strong gasoline demand growth has carried into 2016 and should help support margins, but exports will need to keep pace to soak up excess output.

After sliding nearly $2 during Monday and Tuesday to a low of $35.96 last week, WTI surged midweek on the back of dovish commentary from the Fed. Oil prices closed higher on the week, supported by positive US economic data and headlines about a mid-April meeting between OPEC and non-OPEC producers to discuss a production freeze.

The effects of a stronger dollar on the global oil markets, has been supportive to supply ex-US and a damper on demand growth. The turnaround in the dollar versus major oil currencies, which began in January/February, accelerated last week as the Fed painted a more dovish picture regarding rate hikes this year. The move proved supportive to crude oil prices, although this was mostly focused on the front end of the curve. Later-dated futures have not seen as much strength as the front end; however, Q4 16 futures are trading near $45, a level that may provide producers an opportunity to hedge, revisit capex plans, and tend to their balance sheets. The rally in oil, alongside dollar weakness, will prove supportive to US producers, and if hedging activity for US E&Ps picks up, the market may find itself more reliant on other, less elastic supply to re-balance the market over the near- term.

Technical & Trading Takeaway

From a technical and trading perspective Crude appears to mirroring a symmetrical move with the last significant recovery witnessed in the spring off 2015, both in trajectory and time the market is moving in symmetry, this would suggest that the near/term medium term upside objective is $45/46 as mapped in the chart below.

crudesym

In the near term $39/40 should provide the support platform for the next leg higher as the short squeeze persists. In the medium term I favour entering short positions as price potentially tests the symmetry swing objective at $45/46. I will also be monitoring  intraday reversals on a retest of $39/40 to play the long side targeting the upside objective referenced.

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

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