Could it be that it’s been a case of ‘sound and fury signifying nothing’? According to technical analyst Chris Verrone of Strategas in New York, the crude oil/WTI complex has been basically untradeable for the last year. In June of 2016, WTI was trading at $48 per barrel; a year later almost to the day, it’s still trading at around $48 per barrel. In that time, Chris counts six corrections of 20 percent or more along with five abrupt snapbacks. As he put it, you would have to be just about the most nimble trader alive to catch the lows and sell the highs—either that or a robot. While there has been significant price movement, volatility for this period has actually been trending lower. And as if further confirmation were required, all you have to do is look at the respective S&P or TMX (Canada) energy sectors to see the palpable lack of investor enthusiasm for the energy space. As a footnote, Chris has a $40 target for WTI in the intermediate term.
What was supposed to be the spark or catalyst for the next leg higher for crude, the OPEC meeting in Vienna at the end of May, seems to be fading. The oil market has clearly entertained doubts about the production deal between OPEC and Russia, in particular whether it is going to be possible to bring the world oil market back into balance against new supply, largely U.S. shale coming on to the market. Compliance among the cartel players, new production or over production from various independently minded members and geopolitical problems just add to the mix.
“The game of chicken between them (OPEC) and the market is back on again," said John Kilduff, partner at Again Capital in New York said on CNBC. Oil plunged by over 5 percent on the Thursday of the OPEC announcement. “The meeting was much more of a failure than people realize because of what wasn’t achieved. There are no caps on production for Libya, or Nigeria, or Iran,” Kilduff added. Related: Has Permian Productivity Peaked?
What the market itself is saying is also instructive as declining trading volumes imply diminishing investor interest. Most recent data from the latest monthly CME/NYMEX division Volume and Open Interest Report for April shows markedly declining volumes in the most heavily traded contract, WTI, in the period leading up to the OPEC decision. Month over month (April versus March this year), contract volume declined by almost 20 percent from over 26 million contracts to just over 21 million. Year over year, CME data also reveals a 10 percent decline in trading activity from April 2017 over April 2016. Volumes in May picked up smartly as would be expected, but on a year-to-date basis, CME trading is up only 2.4 percent over last year.
Kilduff and other analysts believe that traders covered their shorts ahead of OPEC’s meeting last week, as CFTC COT (Commitments of Traders) data show a reduction of 91,700 short positions in WTI futures contracts to 278,200 just ahead of Thursday’s meeting. “They covered just before the meeting and that enabled them to have the dry powder to go in and attack once this news came out,” Kilduff added.
The bull/bear argument of any up/down movement in the crude price is a bit like a tetter-totter these days. But it is hard to see that the outlook for oil is encouraging on both fundamental and technical levels. The rise of algorithmic trading has also altered the rationality of all commodities pricing as distribution curves composed of the frequency of words and phrases used in the media are more important to electronic trading than old-fashioned considerations of supply and demand.
If anything, it’s going to become increasingly difficult to be right about the direction of crude prices since they will tend, as J. Pierpont Morgan said of stocks, to fluctuate albeit modestly.
By Brian Noble for Oilprice.com
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Short position from April to May would earn you around 18%
In a month!