Monday, March 16, 2015

Crude Oil Waterfall

Crude oil is in the middle of a waterfall decline.  The Twitter streams are overflowing with newbies trading crude oil.  Mostly from the long side.  While the contango widens out even further, hitting $2.30/barrel currently.  It made no sense late in 2014 to see crude oil plunging while the S&P 500 was making new highs.  They used to have a high correlation from 2009 to 2013.  The relationship broke down completely last year, as positive equities no longer supported the oil market.  It was a bull trap, seeing a strong S&P and weak crude oil, tempting correlation players to buy crude oil/short S&P, or just buy crude oil only.  It has been pain for bulls, along with the constant vig that goes to paying the contango rolling over every month, losing over $2/barrel.

Even if you are right about crude oil going higher, unless crude oil goes higher than the rate of $2/month, you lose money going long.  Just for longs to stay even, crude oil needs to go up $2/month.

A market like crude oil doesn't go down from $100 to $45 just because of a small change in fundamentals.  There was an accumulation of inventories, and eventually those accumulating had enough and would only be willing to add to inventories at much lower prices, they were the marginal buyer of crude oil.  Price is set at the margin, by those that have the most elastic demand for crude.  They don't need to buy the stuff, but if it is cheap enough, they will buy it to try to profit later.  And the more inventories they build, the lower the price that they are willing to pay to accumulate.  It seems like they are not willing to pay higher prices to add to inventories.  They are satiated, and will only buy more at lower prices or if there is a sudden fundamental change in the market.  That is unlikely as OPEC has stuck to their game plan and don't want to exit it prematurely before the shale oil producers go bust.

Crude oil is the most bearish market in the world.  I believe Janet Yellen will be dovish, rallying the euro, yen, and S&P 500, as well as crude oil for a day or two.  Which of the 4 will you short on the rally?  My number 1 short target is crude oil.

The next two trading days will be position squaring ahead of the Fed, which means crude oil, euro, yen, and S&P will likely remain stable to weak.  I doubt they will strengthen going into the Fed meeting (maybe S&P, but definitely not the other 3).

It should be slow trading until the FOMC fireworks on Wednesday.


Anonymous said...

Sold GLD May 110 calls @ 3.70

Long BAS @ 5.39

Ol Dawg

Anonymous said...

Sold BAS 5.71