What about OIL?

9:50 AM

Am I going to short oil before OPEC? I am not sure anymore.

I was stopped out at Breakeven after my entry at $46.97. This is not a bad thing given how much price has come back.

Game Theory

This is probably a good example of game theory(a popular economic principle) in action. Do they try and "burn bridges" with the shale oil producers by making prices cheap but at the expense of depleting assets? Or reach an equilibrium where the benefit is shared between shale and OPEC.

What is also another question is this new piece of data that is found via a deep dive into oil. OPEC can say one thing but do the exact opposite. Production cuts, but export more.

See this link: http://oilprice.com/Latest-Energy-News/World-News/Non-Compliant-Iraq-Now-Claims-OPEC-Deal-Is-To-Cut-Exports.html

 How does that work? If so do cuts even mean anything fundamentally?


Weakness in demand

Most of the recent oil movement has been due to sentiment, however real demand is dry. Storage capacity has increased and stockpiles are large. Shale producers are getting more productive at a cheaper rate.

Source: https://images.hedgeye.com/media_assets/0065/5293/OPEC_cartoon_04.24.2015.png

According to CFTC data, speculative longs have been significantly unwound. This could mean there has been the correction priced into the market. 

These two points mean that the position is no longer as reflexive as it once was.



The OPEC meeting is on the 25th of May, and cut or not, the announcement itself regardless of outcome will have some impact. Many analysts are expecting the cut to continue or even get larger. 

This may be a case of "buy the news, sell the fact" like what we saw with the second round of the French elections. So this run to the upside could be met by a sudden correction, or alternatively met with a disastrous end if cuts do not happen at the meeting.

But then again if OPEC need not actually do what they say does a cut matter?

Fundamentally I must be a bear on this. Given the amount of increase in storage capacity, inventories and alternatives to oil, there is very little backing oil other than sentiment and speculation.


Trade management:

As always, 1-2% per macro bet will be taken. Because the backdrop is so soft, I will be short here but it is a matter of timing. 

Going in before the OPEC meeting could have a sentiment shift towards the upside towards $60 a barrel even though fundamentally this is a commodity in trouble. 

Going in after could mean I miss a big move.

My best bet is to watch the price action on the day of OPEC, if price moves to the upside regardless of the news, it means I will need to wait for an entry on the daily chart.

if it moves down immediately after the then I will enter. However, this depends on the sentiment out of the OPEC meeting, so far the general notion has been quite positive.

Actual levels must be determined later as it is still too early to tell. A swing trade type scenario would be ideal but we will have to wait.

We are currently bouncing off the 200SMA which structurally has always been a strong support/resistance.

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