Tuesday, June 24, 2014

Where to Oil; With Too Many Geopolitical Balls in Air

There are simply too many geopolitical balls in the air right now for many to keep aloft.  While we may glance at some headlines and dig into a few stories, it is difficult for many of us to know, for example, if the Iraq/Syrian borders will be in ISIL hands tomorrow.  Firms like Stratfor do a great job at geopolitical analysis and we are grateful for some of their feedback.  However, to understand enough of current situation to completely understand where oil might trade, we would need to give up our day job – analytic/brokerage.  We may however find some useful information by looking at some charts.  

On June 12th the nearest to expiry July 14 crude oil future contract (CLN4) rallied above $105, a level that had not been successfully breached since September ’13.  On June 12th the $2.07 advance had been the largest single session open/close advance since early December ’13.  Further, aggregate volume for crude on June 12th was higher than any since March 12th, 3 months earlier.  There has in fact only been 6 instances in the last 17 months where aggregate volume exceeded the 837,000 on June 12th ; four of those instances were centered in early July ’13 – almost a year ago.  Finally, the latest CFTC Commitment of Traders report shows ‘non-commercial’ accounts reaching a new record net-long level of 479,000 contracts following the latest week’s 9% addition.  All of the above is offered as evidence that the advance on June 12th was significant.    

Since the vault above $105, open interest has fallen off a bit.  It had reached a 8 month high on June 16th of 1.723m, but has since dropped to 1.707m.  Additional comfort in the bullish prospect would come from additions to open interest as the contract advances.  We have not seen this and this increases the prospect for a reverse lower.  

The two sessions following the June 12th break-out were very small ‘body’ days which show indecision. This is not strong confirmation of the bullish break-out.  Some further consolidation in price action occurred over the balance of last week.  However, into the close of trade on Friday, prices firmed with the front August contract finishing $0.83 higher to a new 9 month high. 

On Monday, August crude opened higher, but falling $1.25 from open, created a ‘bearish engulfed’ of the prior session.  This bearish engulfing is the ‘active’ candlestick formation and the most important in determining near-term prospects…and thus trend strength.  For today advancing price action has not made progress even to the ‘mid’ of yesterday’s body ($106.795).  If August Crude is unable to advance and SETTLE above $106.795 by Thursday, we should add this failure to the inconsistent showings about the initial bullish break-out. 

In Short: We have very likely already seen a high of the bullish advance in crude.  There are important markers within a $1 above.  An advance from here, while currently unexpected by looking at the technical picture would show limited losses for a managed short position.  A pull-back  could spark a significant reduction in ‘large-spec’ net-longs positions resulting in prices falling to $95.                                 Risk: Reward Roughly 10:1.

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