There are very few reliable patterns in any market, let alone the volatile oil markets. There is, however, one thing that seems to happen more often than not. Over the last few years, since the OPEC+ production cuts have been in place, prices tend to climb in the days leading up to a scheduled meeting of either a formal or informal meeting of OPEC. With a meeting scheduled for next week, that may well be the case to some extent again, but this time, rather than trade the expected strength going in, the risk/reward calculation favors selling into any such move.
That upward pressure on pricing as a meeting approaches makes sense. Participants are frequently asked for comments before the meeting begins and, given that OPEC is trying to push prices up at the moment, it should come as no surprise that those comments are usually positive. There is always lots of talk of further cuts and better enforcement in the run-up to a meeting, regardless of the real chances of any agreement to that effect. After all, why wouldn’t they all talk their book?
The above chart for the main WTI futures contract (CL) gives the first clue as to why trading in expectation of that may not work this time around. As you can see, while there is some boost to prices in the run-up to a meeting (marked on the chart by a blue arrow) that move quickly reverses once the meeting is done. That makes timing a long position tricky. Leave it too late to enter and the potential profit is extremely…
There are very few reliable patterns in any market, let alone the volatile oil markets. There is, however, one thing that seems to happen more often than not. Over the last few years, since the OPEC+ production cuts have been in place, prices tend to climb in the days leading up to a scheduled meeting of either a formal or informal meeting of OPEC. With a meeting scheduled for next week, that may well be the case to some extent again, but this time, rather than trade the expected strength going in, the risk/reward calculation favors selling into any such move.
That upward pressure on pricing as a meeting approaches makes sense. Participants are frequently asked for comments before the meeting begins and, given that OPEC is trying to push prices up at the moment, it should come as no surprise that those comments are usually positive. There is always lots of talk of further cuts and better enforcement in the run-up to a meeting, regardless of the real chances of any agreement to that effect. After all, why wouldn’t they all talk their book?
The above chart for the main WTI futures contract (CL) gives the first clue as to why trading in expectation of that may not work this time around. As you can see, while there is some boost to prices in the run-up to a meeting (marked on the chart by a blue arrow) that move quickly reverses once the meeting is done. That makes timing a long position tricky. Leave it too late to enter and the potential profit is extremely limited, leave it too late to exit and the losses can pile up quickly. It should go without saying that the potential for a small profit, but a big loss, is not an ideal situation on which to base a trade.
Nor does the global situation indicate that a long position is one that you want to hold. Brexit is not just the ugly mess that it has always been, it has now developed into a full-blown constitutional crisis. It is hard to see a quick resolution as both a softly-softly approach (Theresa May) and a hardline approach (Boris Johnson) have failed miserably so far. The ruling Conservatives have no answer, and the opposition Labor Party, led by Jeremy Corbyn, is no better. They too are hopelessly split on the issue and so far, Corbyn has been happy to delight in the failure of his opponents but has shown no sign of wanting to inherit the mess. A major disruption of the U.K. and E.U. economies looks more likely with every passing day.
You may think that at least there was some good news on the trade front this week, but was there really? What was announced was that the U.S. and China would be resuming talks in October.
The keyword in that news is “resuming”.
The two sides have talked before, and each time the result has been higher and wider-reaching tariffs than before the talks. Why should this time be any different?
I guess you could say that there is a chance of a different outcome because of this morning’s news that the Chinese central bank is again cutting the reserve requirement for banks in an attempt to boost their economy. That, say the bulls, will force concessions from the Chinese, and it shows that America is winning the trade war! It seems that there are some U.S. stock traders who buy that kind of jingoism, but the more rational, international oil markets are working on the basis that nobody ever “wins” trade wars. Win or not, slowing Chinese growth is negative for everybody.
With all of that going on, even the best efforts of OPEC’s big players to talk crude higher may be to no avail. That is especially true given that there is increasing evidence that Iraq, which has OPEC’s second-largest proven reserves, is ignoring restrictions and pumping at a record rate. They can say what they want, and may even agree to extend or increase the cuts, but with increasing North American output and a big player that refuses to play by the rules, why should traders care?
It seems then that there really are no reliable patterns in markets after all. Even when something works for a while, as buying in front of an OPEC meeting has, the usefulness of the strategy always comes to an end at some point. With a deteriorating international situation and a major enforcement problem for the cartel, that point has now been reached and selling into any talk inspired rallies looks far smarter than doing what the talkers want you to.
