Who's bearish on CL?

Successfully trading physical commodity intermediate-term trends requires a dual-view approach.  

1.) Keeping tabs on changes in supply of the commodity for physical delivery as much price discovery in the front month contracts is related to the constraint of having to deliver physical.

2.) Monitoring larger supply/demand trends that will take shape and impact commodity prices over the longer term drift.

On changes in physical delivery supply, OPEC+ production cuts have aggressively aimed at counterbalancing rapidly increasing US production and tepid global demand.  And their use of shock tactics to overdeliver on cuts and compliance while focusing on constricting US imports coinciding with reduced self-inflicted US imports via sanctions seems to finally have succeeded in causing larger than expected draws in weekly API and EIA reports recently.  Goldman Sachs and Morgan Stanley have recently reiterated the oil bull case in light of these numbers.

However, global supplies and even those in the US are clearly overabundant per this Orbital Insight report.  So all of this OPEC+ effort may have changed the near-term trend in US inventories, but there is a very long way to go globally, especially in Asia.

On longer-term supply/demand trends, the major reason for the price collapse in Q4 2018 was related to rapidly decreased demand perceptions.  Oil has traded in line with US equities with a very strong correlation, an excellent proxy for domestic economic growth and demand for energy.  Should US equities begin to reflect much slower economic growth than anticipated in the rally this year, this sentiment change will almost surely drive WTI prices lower as the primary demand driver is still domestic, though global demand should increase its influence on CL's price later this year and next as supply/chain bottlenecks improve clearing the way for increased export, and the spread between crude in Houston and even Cushing with respect to Brent falls sharply.

And I have strong reasons to believe that US equities are entering a primary bear market downtrend as of right now.  So even though CL has been able to rally in line with US stocks as there was a recovery in US growth and energy demand perception in addition to aggressive OPEC+ production cuts targeting US storage, a change in that economic demand perception is on the horizon amid a sea of excess global oil supply.

To be sure, even a longer-term view of oil from supply-side economics points to ample supply and fleeting, lofty oil prices in this report.

With the 200-SMA above at $60.88 for the May contract, I would anticipate limited upside and longer-term downward drift punctuated by sharp short-covering rallies for at least the next couple months on EIA/API numbers being impacted by the full force of OPEC+ influence.

CL makes new ytd highs

This past Friday as CL broke below the first primary support at $55.00, it felt like there was a reservoir of liquidity, limit orders to buy the contract.

OPEC+, especially Saudi Arabia, has resorted to announcing production cuts and significantly underdelivering on those giving the market short-term upside surprises to counteract increased US production and a slowing global economy and lower demand projections.  This rally since end of December can be characterized as a string of short-term bumps related to the surprises which will eventually run into oversupply/underdemand issues in the future.

A prospective US stock market downtrend will provide downside pressure in CL over the next few weeks/months as the product finally tops out.  I'm not sure how much more output cut panicky OPEC+ and especially Saudi Arabia can afford with their large deficit.  They seem to be panic-cutting for the very reasons I have stated that a longer-term downtrend is around the corner.

I wouldn't be surprised if the contract has also been supported by the CERAWeek convention in Houston this week which has boosted XLE, XOP, and OIH.  But this short-term support will alleviate by end-of-week.

I also wouldn't be surprised if the late-day buying today was hedge funds and other speculators buying in very late into the rally as I have seen them enter the market later in the day at unpropitious longer term prices a few times this year.  But this doesn't mean that the short-term upside momentum won't continue a bit longer...

NG hits primary targets

Last Wednesday night said, "I would expect April NG to test 2.822 tomorrow and 2.80 within a couple days max.  Next support after that is 2.787 and 2.760 near the 50-SMA"

These targets were hit today, and with the very sharp decrease in day-over-day RSI(7), I would expect NG to at minimum retest today's lows of 2.766 tomorrow.

Where's all the exported Crude?

In late Feb, US oil exports made headlines breaking all-time records 3.6 mmbpd+, but China isn't directly buying any of that supply right now because of the trade war.  There's a significant amount of WTI sitting in worldwide storage not accounted for in EIA's estimates, and I'm wondering if the trade agreement isn't signed or executed by the Chinese by summer driving season starting in early April, are oil traders going to ship back and dump it on a US gasoline market that's probably going to see lower demand this year compared to last as we've seen GDP and corporate revenues fall year-over-year?

This is a significant outlier risk that I don't believe is priced into WTI (yet)...

Update on NG - short-term bearishness

I last commented on NG almost one month ago after the March contract had moved toward multi-month lows.  I speculated that a retest of the lows would set up a long opportunity should the temperatures in Raleigh, NC hit lows in the 20s and highs around 40 maximum.  The contract never actually tested those lows and drifted higher for the month as colder weather hit the Midwest leaving the South largely unaffected until today (lows in 20s and highs low 40s) and these past few days.  Today, 1.5 month highs were made near 2.90 for the April contract.  But the Google app shows a strong projection of unseasonably warm temperatures in Raleigh, NC for the next week and a half.  

Also in the meanwhile, U.S. nat-gas inventories have already shrunk as nat-gas stockpiles on Feb 22 stood at a 9-1/2 month low of 1.539 tcf, down -8.5% y/y and -21.6% below the 5-year average.  And tomorrow's weekly EIA inventory data is expected to show that U.S. nat-gas inventories fell -144 bcf last week, a bigger draw than the 5-year average of -109 bcf.

For the first time since before February 7th, I witnessed what appeared to be aggressive commercial hedger short-selling at key times this morning in the April contract after hitting a multiweek high.  In the context of the coldest temperatures in Raleigh for many weeks today and a projection for much warmer weather ahead, this activity is contrarian and bearish in the short term.  NG had tested the upper Bollinger band a few days ago.  Regardless of the EIA inventory data release tomorrow, I am inclined to short-sell NG for day trades if the opportunity arises knowing there is a good chance we will test 2.80 over the next couple of days.  The RSI(7) is coming off extremely overbought territory and registered about -15 day-over-day, and going back to December when the day-over-day spread was -10 or less and as long as the RSI wasn't oversold, the following trading day has always tested lows by 1 tick or broken through it - every time.

I would expect April NG to test 2.822 tomorrow and 2.80 within a couple days max.  Next support after that is 2.787 and 2.760 near the 50-SMA

CL ready to fall in short and intermediate-term

XLE and XOP had very high odds (100%) of putting in higher lows and higher highs today with RSI(7) day-over-day spread from last Thurs to Friday at 10+.  Since Dec 26th, this type of momentum spike never led to lower lows until TODAY.  Additionally, many other non-oil related equity sectors had very strong odds of putting in higher lows today based on various momentum statistics but many of them took out Friday's lows and actually closed significantly lower which is a clear break from the regime that began Dec 26th.  This loss of upside momentum in all types of equities supports my thesis that equity prices are set for an intermediate-term downtrend which, in turn, will place proportional downside pressure on CL to move toward the December lows in the intermediate term (weeks/months).

In other CL news, Baker Hughes that showed active U.S. oil rigs in the week ended Mar 1 fell by -10 rigs to a 9-3/4 month low of 843 rigs continuing their downtrend since last Fall lending to the possibility of a slowdown in US WTI production in 2h 2019.  This possibility would bolster the bull view for 2h 2019 in light of sharp OPEC+ supply cuts especially to the US year-to-date, in addition to improving global demand conditions as a Chinese recovery and reduced Eurozone Brexit risks to economy may offset a slowing US economy impact on worldwide oil prices.

But the supply chain between the Permian and Gulf Coast ports through pipelines and expanded port capacity won't further support export demand until 2h 2019-2020.  Until then, logistical bottlenecks will continue to leave US domestic demand as the major consumer of WTI until later this year.  So the exposure of WTI demand to US economic growth (equities are forward-looking proxy) leads me to believe we have significant further downside until export demand can begin to buffer WTI price from US demand somewhat.  The WTI Midland-WTI Houston and Cushing-Brent spreads would decrease significantly as WTI grows into an international oil grade enabled by supply chain improvements.

I also noticed before 1030am on Friday that CL saw large blocks find no bids (in increasingly unaccommodating book) identical to trading that occurred in NQ, ES, and YM at the exact same time.  This increase in correlation to nearly 1.0 did not go unnoticed and bolsters my thesis that equity weakness will carry over into CL.

So in light of that highly correlated weakness witnessed this past Friday, surprisingly weak XLE and XOP (and other non-energy related equity) trading today negating the recent regime, and an expectation of weakening US equities in the short and intermediate term, I expect CL fall precipitously in the short and intermediate term.  Beyond the obvious $55.00 support which should break soon, I would expect mid $52s to provide some support as a confluence of previous support, Bollinger Band (20,2) lower band, and 50-SMA.