How I trade crude oil

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I guys, this is some though about a general oil trading approach. Would be glad to exchange with you

The goal of this post is to tackle different aspects I find important in oil investing. What trader or investor should know and where to look at. But each point in there could be way more developed and should be used in a proper context.

Chart on https://oiltrading.blog/

(1) A multi-factor approach
(2) Observations about oil
(3) Oil Investing basic approach

(1) Multi-factor approach

Oil is wonderful for the generalist trader. Depending on your investment horizon, you have to weight different elements and signals before taking a decision, as for me it generally goes this way:

Short-term: importance of chart analysis / technicals
On the short-term oil is a very volatile asset. But there are strong and “respected” indicators that can sometimes help. I often use technical analysis in a ranging market or “slow” day, without any important news or data release.

What I use the most: support & resistance, Bollinger bands, RSI

Ex in this trade, indicators where showing overbought conditions, and it turned out to be profitable: 13.12.2016 – OPEC Deal fallouts: Short Trading Opportunity

Medium-term main risk: geopolitics
Major risk when trading on a week or month horizon is that unexpected event happens in the world.

I.e: war in Middle East, riots in Saoudi Arabia, sabotage in Nigeria, Trump tweets

On the long-term fundamentals tend to keep things balance and if there are no huge change in amount of supply/demand linked to the peculiar event the price action has time to mean-revert.

On the short-term the risk is lower (day trading, scalping). But always there

Long-term trend: Fundamentals
Commodities investing is all about demand and supply on the long-term. Why did we recently experienced a 70% drop? US Shale oil disrupted the fragile balance in the oil market.


The importance of the US Dollar
Oil is traded in dollar. As a result, it is inversely correlated to this currency.

This inverse correlation is especially clear when there is a long-term trend. In 2003 – 2008 the dollar was in a sustained bear trend while crude oil witnessed one of its strongest bull runs. Then the trend changed direction at the same moment during the financial crisis: rally in dollar and fall in oil.

Yet on the short and medium term this correlation may not always hold. The context and/or other news may drive oil prices regardless of the direction of the dollar.

(2) Observations about oil

Seasonality (US)
Spring: usually lower demand. Indeed refineries schedule their repairs during this period, roughly 25% close

In May the maintenance season ends -> refinery oil process increases -> stock level decreases -> price increases


Decay in Producer Data / Production Data

In the US for instance, we have been assisting to a fall in oil rigs in 2015 , yet the production began to fall in the second semester of the year. There is a latency period to take into account

Oil loves Great Movements
Oil has been historically prone to impressive upside/downside move

For instance, over the past 30 years (except for current), oil has experienced 6 big lows, and all were in V-shape (see graph above).

(3) Oil Investing basic approach

Technicals on the short-term
Look for: trading range, support and resistance on the short-term

Consider fundamentals on the long-term
On the long-term Even if you identify a strong technical signal, a fundamental signal will have the upper-hand.

When to expect volatility: fundamental data such as production, rig counts or inventories data
Volume usually increase a lot around those release. Hard to trade and can break a trend.

Usually main drivers of the prices.

Sentiment: Commitment of Traders report
To see open interest in oil futures. Good indication of market sentiment.

Sometimes really useful when adopting a contrarian approach.

Geopolitics: the x factor
OPEC meetings, Russia, Iran sanction-related meeting, Trump declarations…


Another example thoughts: https://oiltrading.blog/2016/12/14/oil-is-a-noisy-market-importance-of-convictions/
 
Hi guys,

Not so much reactions. Will use this thread as a "trading" journal.

I am in the green again on my short on Brent https://oiltrading.blog/2016/12/19/week-19-12-2016-still-downside-potential-for-oil-on-the-short-term/

I still see some downside so i added to my position. This is a medium-term trade and I don't care too much about the noises (if there is a spike back up)

It is all about fundamentals and for now the situation is very shaky. Would reconsider in January but even with the implementation of OPEC deal I am not very bullish.
 
Found the free Investor Series 1-10 informative and educational. Free, of course, is used to introduce other paying services. However, no hard sell and spam box still empty after some months.

http://oilprice.com/

Oil Investor Series.PNG
 
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I usually trade EURUSD most of the times however I look at commodities too for some while but all these commodities including oil and gold mostly seems to be bearish. Still many investors / traders found it a good opportunity to make money by selling them short.
 
I usually trade EURUSD most of the times however I look at commodities too for some while but all these commodities including oil and gold mostly seems to be bearish. Still many investors / traders found it a good opportunity to make money by selling them short.

Completly agree with you.
Just posted a new article: for Q1-Q2 I see a lot of downside for oil
https://oiltrading.blog/2017/01/30/oil-is-going-down-on-the-medium-term-q1-q2-2017-fundamentals-sentiment-and-price-action-analysis/

Why bearish for now?

The recent price action was overwhelmingly a result from political manipulations from OPEC. I won’t get in too much details but the oil producing countries have a budget to manage and Saudi Arabia / Russia were strongly enticed to push oil price higher (both were in terrible situation with a price under $40 a barrel). So we did get an agreement.

Oil went up and is now sitting above $50 a barrel. This movement is natural and reflect new expectations concerning the fundamentals. Yet those are still expectations and despite the implementation of the cut, I think fundamentals remain so-so (at best) and are not fully priced in the market. I don’t know when, but if I am right in a near future production and inventories data should send price lower.
 
Oil is still ranging hard.

I am a little worried due to saoudi aramco coming ipo. I think there will be some sort of market push and no real decline because of this. Too many people need oil higher and this is bothering me despite my fundamental convictions. Still holding my shorts but will sell quickly at previous resistance level.
 
Why I think oil is going down (breaking the range) on the medium term

Oil market has been trading sideways since the OPEC cut agreement. I made several calls on the short side which turned profitable but the market quickly went up afterwards. Today I am not calling a short-term movement: I think we will be entering a new medium term trend to the downside

The recent price action was overwhelmingly a result from political manipulations from OPEC. I won’t get in too much details but the oil producing countries have a budget to manage and Saudi Arabia / Russia were strongly enticed to push oil price higher (both were in terrible situation with a price under $50 a barrel). So we did get an agreement.

Oil went up and is now sitting above $50 a barrel. This movement is natural and reflect new expectations concerning the fundamentals. Yet those are still expectations and despite the implementation of the cut, I think fundamentals remain so-so (at best) and are not fully priced in the market. I don’t know when, but if I am right in a near future production and inventories data should send price lower.
 
Oil is dead, the range has contracted. anything that trades @ 50 sucks
 
Why I think oil is going down (breaking the range) on the medium term

Oil market has been trading sideways since the OPEC cut agreement. I made several calls on the short side which turned profitable but the market quickly went up afterwards. Today I am not calling a short-term movement: I think we will be entering a new medium term trend to the downside

The recent price action was overwhelmingly a result from political manipulations from OPEC. I won’t get in too much details but the oil producing countries have a budget to manage and Saudi Arabia / Russia were strongly enticed to push oil price higher (both were in terrible situation with a price under $50 a barrel). So we did get an agreement.

Oil went up and is now sitting above $50 a barrel. This movement is natural and reflect new expectations concerning the fundamentals. Yet those are still expectations and despite the implementation of the cut, I think fundamentals remain so-so (at best) and are not fully priced in the market. I don’t know when, but if I am right in a near future production and inventories data should send price lower.

Patience pay off....

Made my month today
 
After my call to the downside Oil Trading – Oil is going down on the medium term. (Q1 2017) – Fundamentals, Sentiment and Price Action Analysis

I am now shifting my position to be long on the medium-term: Beginning to Think about Going Long – (Q2 2017)

After the recent correction in oil prices I think it may be time to consider building a long position.
Will regularly update this article.
My reasoning is based on three things:
(1) Market is no longer overbought
(2) Fundamentals are beginning to improve
(3) OPEC should announce new cuts
(4) Conclusion

(1) Market is no longer overbought​
One of my main arguments for my previous short was the historical high positioning in oil futures. Professional investors were super-long but the price was ranging while the fundamentals were saying “the glut is still here and growing”.
After the recent correction, markets participants are now more mitigated.

During the week ended March 14, hedge funds decreased their net-long position, or the difference between bets on a price increase and wagers on a decline, by 23 percent to 288,774, the largest decline on record and the lowest level since December. WTI tumbled 10 percent during the period. Longs fell 8.9 percent to the lowest level since early January, and shorts doubled from the prior week to the highest since November

One can think that the still net long position in the market is now more sound and reflect the view of long-term investors (speculators have moved out).
At the same time, the liquidation of the unsustainable build-up in net-long positions takes away some of the harshness of the downside risk. Sort of like a safety valve that has relieved some pressure, the reduction in bullish bets means that there will be less of a danger of another sharp correction in prices stemming from speculative moves.

2) Fundamentals are beginning to improve​
As always, fundamentals are the one reason for my long thesis.
I think we are at an inflection point.
Lag between cut and inventories data.
As I already mentioned in different posts:
How to Trade Crude Oil or Observations about Saudi Arabia Production and Oil Prices: Lag between Production Cut/Increase and Effect on Prices
There is a lag between production-related decision (here OPEC-cuts) and their effect on supply/demand and inventories. A rule of thumb is that you can bet on a 3-month lag on average. OPEC cut were decide around the beginning of December – add three months and here we are in March/April.
Some recent data already show this change in trend: lower build than expected, lower inventories in floating storage…
Seasonality
There was bearish seasonal factors in the U.S: it is refinery maintenance season and crude oil stockpiles are increasing. Once maintenance ends, inventories should start going down
The summer season is typically good for oil prices.
Spring: usually lower demand. Indeed refineries schedule their repairs during this period, roughly 25% close
In May the maintenance season ends -> refinery oil process increases -> stock level decreases -> price increases

(3) OPEC is coming back in the game​
OPEC members and especially Saudi Arabia are strongly enticed to push prices higher.


When major market participants want something, and this is especially true in the oil market, history shows us that they usually succeed (see slash in output during the 2008 financial crisis and the huge recovery following).
When OPEC does announce – and adhere – to production cuts, crude prices rise.

Saudi Arabia
As we saw with the OPEC deal and the record compliance (120% for Saudi Arabia) – they are willing to commit and make huge efforts (deal with Iran- the archival!) to succeed in their IPO.
What could happen
Keep in mind Saudi Arabia is a big regional power, an allied from the US, a states that has contracts with numerous companies (energy, banks, industrial, defense..) worth billions of dollars .
They have different tools at their disposal to increase oil prices:
–Saudi Sate: announcements, position, influence and action.
Ranging from simple declaration to aggressive cuts.
–OPEC: announcement, position, influence and action.
Ranging from simple declaration to aggressive cuts.
-Big banks and institutions participating in the IPO will certainly have a “nice” and biased vision of the oil market – driving sentiment higher at the right time.
Ranging from reports to direct intervention in the market.

(4) Conclusion​

I think that the present situation is now better priced in the market. the market is no longer driven by the OPEC.
This could be an opportunity if expectation were to go up drastically again. I think OPEC may soon interfere and we may enter a new cycle of “OPEC-driven market”, with the OPEC-May meeting getting closer
 
Today I didn't trade.

Looking at the chart today my analysis of going short was right for both light crude and brent.

On the 1hr chart for light crude can see maybe my support area could come in for long. What are peoples thoughts?

For Brent; daily I'd have my first support at 52.76 area but I would be more inclined for it to be support of around 49.94

also it had a short all day.

continue with short on brent to circa 50?

light crude will it go lower if so what is next support?
 

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Which way is crude going to move this week?

today going short either brent or crude light at 12 noon GMT would have made nice profit. charts showed decent entry based on price action.

missed the train! im looking to short either if i see the entry on price action
 
go with the trend, use price action to get into trade and you can see profit.

Trend on daily oil light clearly showed trend of going short

1hr chart showed 2 consecutive bars with wicks ontop showing sellers pushing back down.

if you went onto 5 min chart after the second bearish candle closed you could have seen a couple of entries.

Which is best I don't know, me personally I can see 2 bars with wicks where you could have got in. You could have also just go in on the close of the 1hr chart at 50.10, you could have seen a profit down to 49.30

tomorrow i'm looking for short on oil, why? because trend is bearish.

If price action shows long I'm staying away, I want to go with overall trend. I'll only go long if at least 3 daily sessions show a bullish trend (higher highs, higher lows, not a sideways trend)
 

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Tablemountain,

I traded oil for fun this week (es mini specialist), the trades were sound and I traded both (added positions to the second short) The first short via the 5 min, was the easiest trade of the day, you can't see on your chart , but structurally we upthrusted a recent high, volume picked up indicating supply and as we broke the previous low I let the market pull me in, going with the flow. For the second trade the 1st bar is aggressive, I understand why you entered here (the large up bar, showed no upside follow through and we broke the low, yes the market does like to test, but not like this, at the time I remembered thinking, is this way TRUE demand acts, is this buying of good quality no. hence this was orchestrated by the larger funded operators to eradicate weak shorts. The second arrow confirmed weakness and I added a few contracts, rode it down for few hours. I like oil, its a different beast, but not as graceful as the S&P, depends on my mood :)

Good luck
 
Foroom.

I disagree, one should be predicting direction within their individual gaming plan. Oil, yes can be a little volatile, BUT still adheres to market structure and principles. Oil set ups for swing trading occur more frequently ( I hold anywhere between 3 days and 2 weeks). Ergo, of course one can gauge direction. Markets aren't complicated, break it down to its simplest form, demand/supply and look for imbalances.
 
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