WTI Is Still Ranging And On The Turn

A couple of weeks ago I opined in these very pages that WTI was essentially trading in a range created by sensitivity to its own price. The theory was that somewhere around the $51 level seemed to be pivotal, with production increasing above that point and decreasing below it. The natural tendency of markets to overshoot means that the range created extends several dollars either side of that point and the tendency of traders to place orders just inside a range means that it will narrow over time. That would give us a bottom somewhere around the $48-49 level. It is still really too early for a big old "I told you so", but the price action in crude futures over the last couple of days definitely supports that theory.

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After a rapid climb, increased U.S. production and talk of problems with some OPEC members' resolve to stick the current schedule of cuts, let alone actually expand them, caused a rapid selloff. As usual that brought out the exaggerators. One particular "analyst" from a major Wall Street firm was all over the media predicting that WTI was going to $20 a barrel on the move down. One assumes that he was in need of attention, because he was totally ignoring the pricing dynamic around $51 and the trading reaction to it.

What has actually happened over the last couple of days is that futures got below $49 and then this week's inventory numbers showed a much larger than expected draw on crude stocks, and we reversed after forming a bottom around $48.20. If this afternoon's rig count number is even marginally less than expected the pattern will be confirmed and WTI will receive another boost.

It is quite likely that even the longer term fundamental factors will be supportive of oil over the next few weeks, enabling a run back up to the top of the range in the low $50s. History tells us that the worries about OPEC's resolve are entirely justified as in the past coming to an agreement and sticking to it have been two very different things. There is no reason to believe that this time will actually prove to be any different, but if nothing else the rhetoric looks likely to shift.

The OPEC members will meet in Vienna in a month's time and, again as I have pointed out here in the past, there is a tendency towards unanimity of purpose as the meetings approach, even if there has been public sniping and disagreement in the interim. The thing to remember here is that nobody has anything to lose by talking oil up as the meeting approaches, so why would they not?

As I said earlier it is too early to be even planning, let alone performing, a victory dance, but the evidence so far suggests that WTI is still ranging. At any stage a major change in fundamental conditions could easily break us out of that range in either direction so risk control is still needed. If, for example, it becomes obvious that non-compliance is rampant within OPEC and the non-OPEC countries that agreed to the cuts a few months ago, then we could easily drop through $45. For now, though the range is intact and I am long WTI at $48.50, with a stop just below $48 and an initial target of around $51, and happy with the position.