Day Trading Oil in Days of Turbulence

Day Trading Oil in Days of Turbulence

In 2015, the biggest stories in the financial world have revolved around Greece, the fed, and oil. Greece continues to face huge challenges with citizens currently fed up with austerity measures imposed by the creditors. Speculations that the fed will hike interest rates this year have been rife. Now, all eyes are fixed on December’s fed meeting where many expect to be the beginning of tightening. Oil on the other hand has been on a free fall since mid-2014. It seems this free fall will continue as oil experts foresee recovery only in 2018. A recent report by oil watcher IEA (International Energy Agency) stated that oil will likely recover to $80 a barrel in 2018. The chart below shows the YTD chart for crude oil.
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Oil price movers

 

As a commodity, global oil prices are attributed to many reasons. Key among them is the demand and supply of the product. As supply for oil increases, so does the price continues to fall. On the other hand, when the demand increases, the price goes up. However, in many cases, the demand has remained stagnant for many years.

There are many factors which affect the oil prices globally. For instance, geopolitical issues are very key determinants of the supply of oil. For instance, for many issues, Iran has been sanctioned by key countries from selling their oil in the respective countries. From 2014, the geopolitical issues in Russia and Ukraine have reduced Russia’s supply of oil to the international markets.

Oil stockpiles continues

In a recent report by EIA, it was noted that oil stockpiles are in increasing. This was attributed to continued increase in production in the OPEC (Organization of Petroleum Exporting Countries) countries. Key countries such as Iraq, Saudi Arabia, and Russia has continued production with the increasing demand of the black gold. The chart below shows the increasing oil inventories as noted by IEC.

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In the developed nations, oil inventories have increased by almost 14 million barrels to reach 3 billion barrels in the previous month alone. Historically, during this time, oil inventories tend to reduce as many firms go for maintenance. In fact, many fuel storage depots in Southern countries have been filled to capacity.

In addition to this, the quantities of heating fuel (diesel) were at a 5-year high in August with more than 600 million barrels.

For oil producing countries outside OPEC, the supply of oil will fall in 2016 according to the report by EIA. The organization forecasts that oil in these countries will fall by 600K barrels per day. This contrasts the 2.4 million per day production in 2014.

Another macro issue that traders need to keep focused on is on the Iran deal. As stated above, Iran has for years been sanctioned by key oil consumers against supplying oil. However, in a deal that was signed in August, it is expected that the country will start exporting in 2016. This will increase the supply potentially leading to reduced prices.

This year, demand of oil has increased significantly by 1.8 million barrel to 94.6 million barrels per day fuelled by growth in India’s demand. If all goes as expected, next year, this number will increase by another 1.2 million.

How to trade these prices

In the past month, Brent oil has been trading between $49.35 and $47.8 a barrel. WTI on the other hand has traded in the range of $47.4 and $42.5 a barrel.

Both Brent and WTI are trading below their 200-day moving averages. The 200-day average directional movement index (ADX) for WTI is 16. For Brent, the 200-day ADX index is currently at 20.63. In addition, the 200-day bear’s power for Brent is currently -12 while that of WTI is -10. Respectfully, the bull’s power figures are: -1.27 and -1.79.

As a trader, these technical indicator figures are very important. Though not conclusive, they show an increasing pattern where oil prices are expected to go down in the coming months. It is however important for a trader to use the technical indicators that they have experience in. These could be MACD, Bollinger Bands, and Moving Average Oscillators.

Another alternative strategy to trade crude and Brent is to conduct a correlation analysis. Historically, these two have always had an almost perfect correlation. Therefore, shorting one and going long another can open up opportunities for hedging. This should however be done after a rigorous technical and fundamental analysis.