The crude oil market is dominated by the global commercial traders. Their collective actions within the marketplace reflect the most thoroughly researched best guess consensus of future prices. We follow their actions through the Commodity Futures Exchange Commission’s (CFTC) weekly Commitment of Traders (COT) report. There are two things we’ve learned; they have better access to better information and they believe the crude oil rally above $60 per barrel is one to be sold.
I’ve posited several times that the commercial trader group in the Commodity Futures trading Commission’s weekly Commitment of Traders report are the best predictors of medium term moves in the market. Their models are better. Their information is better. Their access is better. These statements apply to everything from their weather models to the latest in artificial intelligence to having ears in all the right places. Before this is dismissed as a cynic “hating” the game, remember that we can put the commercial traders’ actions in the markets to use for our own benefit. That is the basis behind our research at COT Signals.
This week started off with our Chicago wheat futures analysis for TraderPlanet in which we discussed looking for a selling opportunity near the 50% retracement level at $6.05 just through the resistance at $5.80. Tuesday, the market traded to $6.10 before selling off down to $5.70. Tuesday’s reversal also triggered the entry for our COT Signals Mechanical system.
The wheat trade came straight from our nightly discretionary COT Signals which has a 30-Day Free Trial.
Tuesday we discussed the growing glut in the crude oil futures market because we noticed how actively commercial long hedgers are locking in future supplies. We still see this as a trading opportunity.
Finally, our main piece focused on the Diminishing Effects of Global Quantitative Easing. This is where we left off in Hand Quantitative Easing to Germany. We did not expect Japan and now, China to come in and throw gasoline on the fire the way they have but the fact is, we now have three major regions kicking in QE programs since late September compared to the US enacting three programs over the course of four years.
The crude oil market has been under pressure on all fronts. It’s been pounded by declining global growth numbers and diluted by growing global production. Structurally, this market must work its way lower over time. However, the 5.5% decline over the last week or so may be a bit overdone.
Looks like we’re batting .500 for the week with a loss in the bond market being more than offset by the profits in corn. Meanwhile, our primary piece uncovered a nice pattern in the crude oil futures that we’re still waiting to take action on.
Free 30-day trial of nightly trading signals based on the Commitment of Traders Reports.
The story in, Bonds Creeping Towards Lower Yields, which was published at TraderPlanet still holds. Commercial traders, while roughly neutral in their current position, have rapidly purchased more than 17,000 heading into this week’s trading. This buying should help the support around 140^00 hold as the market makes some type of run at the October highs.
Mechanical COT Signals’ portfolio equity curve tracked by Futures Truth.
Other Sample Portfolios
Tuesday’s corn futures trade for Equities.com combined classic Commitment of Traders’ analysis along with an inside bar trigger to enter the trade. Sometimes, it works like a champ. It’s a high percentage trade and it played out well.
Finally, our main piece required eyeballing more than 20 years’ worth of commercial trader activity in crude oil futures. In, “Time to Buy Crude Oil’s Decline” we discussed a very specific pattern that we’ve only found eight examples of in the crude oil futures. More importantly, this pattern’s predictive power has been quite strong. Read the full piece for details.
The bulk of my Commitment of Traders research has gone into creating COT Signals.
The crude oil market has received its just due in the media gaining everyone’s attention by declining nearly 25% since the summer’s peak. The market’s consolidation through most of October clearly spelled trouble in November. Trend traders will tell you that consolidation almost always equals continuation. Thus, the final spike lower hasn’t taken many traders by surprise. Furthermore, November’s range expansion has not been greeted with additional selling. In fact, our analysis suggests that the speculative nature of this decline has nearly run its course. This notion is supported by the fact that for only the eighth time in the last 20 years, we’ve seen the net commercial trader position grow by more than 100,000 contracts in two months as you can see on the chart below.
The price of crude oil has risen by more than 13% in the last two weeks. The price has been driven up by a perfect storm of temporary factors including seasonal, environmental and political issues. We believe these will subside and return us to a fundamentally over supplied market causing it to fall back below the magic $100 per barrel mark.
Crude oil futures traded under $93 per barrel as recently as June 24th. This is also the day that flooding concerns began creeping into the news from Alberta, Canada, the largest exporter to the U.S. The flooding eventually shut down pipelines from Enbridge and Penwest Exploration beginning on June 25th. Uncertainty regarding future supplies created support for the market. Prices stabilized between $94 and $96 per barrel.
Meanwhile, unrest in Egypt began to grow. It started with the mob beating death of four Egyptian Shiites outside of Cairo. Civil protests calling for the ouster of elected President Mohamed Morsi fell on deaf ears while his primary support came from the fundamentalist Muslim Brotherhood. Egyptian citizens had finally lost their patience with Morsi as basic problems of infrastructure improvement and unemployment began to take a back seat to what was becoming a country ruled by Islamic law rather than the secular democracy that was fought for during last year’s Arab Spring.
The natural disasters and political unrest also came as the market was heading into the first of crude oil’s twin peaks of seasonality. The first peak is Independence Day. The second comes around Labor Day. The combination of all of these factors has forced the crude oil market rapidly higher in the face of weak fundamental data.
Crude oil inventories are well above their five-year average. This spring actually saw the highest inventories in the last five years, nearly touching 400 million barrels in May. This is more than 14% above the five-year average and 3.5% above last year’s inventory. The market remains oversupplied with inventories currently around 382 million barrels, still well above the current five-year average of 337 million barrels. In fact, inventories would be even higher had we not drawn down 10 million barrels last week to meet the temporary decline in Canadian imports.
Crude oil futures are currently trading near $105 per barrel. The technical pattern that has been forming on the daily charts is called an, “inverted head and shoulders.” While many people have seen tops referred to as a head and shoulders pattern, fewer are familiar with its bullish relative. Technically, the pattern is measured the same way. However, instead of subtracting from the neckline to find a target down below, we simply add the distance from the right shoulder to the neckline to generate an estimated high price for the move. In this case, the estimated target is around $106.50 in the September crude oil futures contract.
The situation in Egypt is the only wild card still in play. Mohamed Morsi has been ousted as President. The Egyptian military now appears to be running the country. Calls are already being made to host a new Presidential election along with proper monitoring of the voting process. The United States has remained curiously aloof through the recent unrest. President Obama appears unsure of which horse to back and is leaving our options open. Technically, not categorizing the uprising as a “military coup” allows us to potentially back the next ruling party, regardless of the outcome. This is far more palatable than stoking the unrest of a civilian uprising within the Middle East.
Trading the crude oil futures market during a period of Middle Eastern unrest is not for the faint of heart. While we expect the market to top out shortly, there is no telling exactly when the next news announcement may cause the top to be completed. This means we don’t know exactly what the risk may be to our account values. Therefore, a more conservative approach would be to use an option spread that allows us quantify our risk while accepting that our rewards will be limited. The first rule of trading is, “always know the risk.” We will continue to look for reversal chart patterns that would suggest the market is heading back towards its 90-day average price of $95 per barrel.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.