Strategic trade
Trade view / 06 October 2016 at 10:18 GMT

A longer-term view on the oil trade

Managing Partner / Spotlight Group
United Kingdom
Instrument: CLX6
Price target:
Market price:

The US Energy Information Agency has estimated that “global” petroleum and other liquid fuels inventory builds averaged 1.8 Million barrels per day (b/d) in 2015. The pace of inventory builds is expected to slow to an average of 0.8 million b/d in 2016. 

Inventory builds are expected to continue into early 2017, and then consistent inventory draws are forecast to begin in June 2017. Therefore there should be a steady decrease in the petroleum surplus that has for so long kept prices in a depressed state. This can be seen in the first chart shown below.
oil balance

Source: EIA

This will, I think, prove to be far more significant in determining the price of oil as against the potential of an output agreement by the Opec members in the medium to longer term.

The news on this agreement appears to change from day to day and I have little faith in it being enforced. Iran will not wish to curtail its opportunity to sell oil legally in the market for several decades. There is also a considerable level of repair to oil producing facilities in both Libya and Nigeria.

However, the Federal reserve has shown in successive oil reports that the oil price on a tic by tic basis and in the short-term will be influenced by supply rumour and statement…but in the medium- to long-term oil prices and oil production are uncorrelated... It is demand that is the key driver.

Since June 2014 the decline in oil prices was seen as being driven due to a retreat in the level of concern as to future availability of oil supplies and thus heightened expectations of future excess supply in global oil markets.

Market mindset...a short-term prism

November WTI (CLX6) tested the $50/barrel resistance level Wednesday, October 5, reaching $49.97 as the EIA report showed crude oil inventories declining. Prices were lower during European hours on Thursday, but remained supported near the highest level of $49.98.

Crude oil inventories declined 2.976 Million barrels which is lower than the expected build of 1.5 Million barrels and confirming the larger API report’s drawdown (drawdown of 7.6 Million barrels) from Tuesday. WTI pulled back slightly from the high and settled at 49.83.

Source: Spotlight Ideas      

 WTI 5 Year Chart:
Source: Spotlight Ideas

I am looking to make a strategic investment in oil at these levels. I will be distracted by the short-term “noise” that will rotate the price higher or lower by a few dollars and cents. Instead it is to seek a level that will reflect the balance between global demand and the surplus crude production from Opec as against the overall production level. The EIA suggest that this figure will fall to 1.35 Million bpd next year, a decline of 66.08% from the peak level of the past decade at 3.98 Million bpd in 2010.

Management and risk:

Parameters: WTI November 2016 (CLX6) with a view to roll into Dec 16 etc.
Entry: Buy 49.74 09:31 GMT
Targets: 52.14 ... 55.96 ... 56.90 ... 59.44
Stop: 42.00
Time horizon: Strategic Trade
— Edited by Clemens Bomsdorf

Non-independent investment research disclaimer applies. Read more
Pandorra Pandorra
Looks like all lines finally has became parallel and trending up.
However some hooks below Stephen SL level 42 are still possible in a short time.
Very smart, Stephen, call to buy the space at market while buy opportunity is around your loss.


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