Forego The Temptation Of Betting On Crude This Week

I don’t wish to boast (who am I kidding, of course I do), but in these pages I suggested that oil would move up around three weeks ago and then, last week, that it would turn and drop lower. The twenty day chart below shows why mentioning that might be considered bragging.

(Click to enlarge)

In the light of that, and given that I am obviously hotter than Kim Kardashian right now, I would love to use this week’s ramblings to give a definitive call on the next move in oil. Unfortunately, though, I have no idea where it goes from here, at least in the short term. That is not something that you will hear a columnist and pundit say very often, but it is something you will frequently hear in dealing rooms around the world.

When I was being trained for my career on a trading desk we were encouraged to admit when we had no clue as to what the next move would be. To do so was not considered a weakness, but a strength. It stopped traders taking positions for the sake of it, based entirely on guess work. Positions should be the result of a consideration of fundamental and technical factors and when those factors contain reasons to buy and equal reasons to sell, as is the case right now, square is the best position to have.

(Click to enlarge)

The same chart as above with a few squiggles added indicates why technical analysis tells us little here. The drop from the high a week or so ago was classic in a couple of ways. Firstly it stopped just short of the 78.6% retracement line, which is significant to those who follow Fibonacci numbers, and many traders do. That also happened to approximately equate to a nice round number, $73. That could mean that we will see a reversal from here, or it could be just a retracement which is already well underway and after which we turn lower again. In addition the drop took the form of an Elliot Wave pattern, with 5 waves as marked by the arrows on the map. Admittedly the “up” waves (blue arrows) were a bit weak, but the pattern is still there and, after five waves, is over. Until another set up is formed, then, the technical analysis that I favor has already happened, and tells us little about the future.

That creates doubt as to the next move, but so does a fundamental analysis. The existing supply and demand situation certainly suggests that oil should continue on downwards. We are still oversupplied as this week’s inventory build amply demonstrated, and with an increased rig count for the last couple of weeks that looks unlikely to change in the near future. The fact that Hurricane Hermine looks like it will miss storage and refining areas, and therefore not negatively impact supply as some had anticipated, but hitting all up the East coast of the U.S., and therefore dampening energy demand, will certainly not help in the short term.

There are, however, two contradictory trends. Firstly, this morning’s jobs report miss made a Fed hike less likely in September which will put downward pressure on the dollar, and therefore upward pressure on oil prices, as well as improve the short term growth outlook for economists. Secondly we are approaching the Algiers meeting of OPEC ministers, and the campaign of talking up the chances of a production freeze or cut is still going strong. I said last week that the market’s lack of reaction to that was one reason why I switched to a short bias, but the longer it continues and the louder it gets the more likely it becomes that the market starts to react again. That is, of course especially true now that the market has dropped and there are shorts to be squeezed.

So, whereas the last couple of moves in WTI have been, to my mind at least, fairly easy to read, the picture is now muddied at best. In that situation I will forego the temptation to place a trade for the sake of it and sit on my hands until the picture is clearer. You may want to consider doing the same.