CL short-term bearish

The oil market continues to provide more drama than a Kardashian family reunion.  A few weeks ago on behalf of his allies outside of OPEC (OPEC+), Putin mentioned that although there were no plans to significantly increase oil production yet, macro risk factors like Libya unrest, Venezuelan embargo, and Iran export waivers could change production compliance going into the June cartel meeting.  Since then, conflict has escalated in Libya and Trump surprisingly granted no Iran waivers past May 2nd though he claimed to have a conversation with Saudi Arabia and UAE to supply the market should a shortage occur.  The latter event was considered a black swan by many participants seeing June CL rise over 2% past $65/barrel on Sunday overnight trading after the long Easter weekend.  In response, Iran has threatened to close a major canal that can bottleneck 20% of global crude oil flow.

This binary outlier upside risk has increased the noise in OVX considerably over the past 3 days as traders bid up deep OTM USO option premium allowing the index to close above the 20-SMA 2 days in a row for the first time this month.

On Tuesday, I saw hedgers accumulating CL, but today, I witnessed the opposite as I rode CL lower into and after the EIA number which showed a surprisingly high WTI build while gasoline inventories shrank.  

At this point, I believe the risk that deteriorating OPEC+ compliace into a slowing global economy is the outlier more likely to be priced into CL in the near/short-term despite Saudi Arabia saying that tighter Iran sanctions do not necessitate immediate action.  The Iran waivers don't expire until May 2nd, so Iran has some time to negotiate in addition to other countries who would like to Trump to reconsider waiver extension.

Per an earlier post, "Additionally, XOP's RSI(7) fell more than 10 points today which has led to further downside 1-2 trading days later every time this happened since January predicting we will take out today's lows in the June contract in that timeframe."  This signal occured again today; first target is $65.25, then $65.09, the 50% retracement of the move up since late last week, and $64.75 is the 61.8% retrace.  It'll be interesting to see if we flush down to $64.30 if $65 is taken out.  I wouldn't be surprised with all of that aggressive call buying per OVX on the move up this week, and now that premium is fading leaving hedge funds holding the bag...

The chart below shows June CL with an overlay of OVX and both 2-day historical volatility and true range studies below.

CL finding unusually strong near-term support

I had expected May CL to have tested $62.85 by now, but the marginal new multi-day low today at $62.99 was met with surprisingly high book thickening.  Additionally, OVX did not make a higher high today despite CL making a marginal low which aligns with decreased volatility related to a thick order book.  This liquidity may suggest widespread confidence in a bullish EIA number tomorrow, especially on the gasoline side since the crack spread trended significantly higher since last week and the gasoline inventory draw was much larger than expected.

CL retreats

May crude oil made a sizeable move down today toward my short-term $63.25 and $62.85 targets.  I noticed hedgers entering the market with shorts yesterday morning though the book was unusually thick, resilient, and resistant to intraday trends even on the EIA inventory release which came in at a signficant inventory build, but less than last week's number as I expected in my previous post.

Today's trading saw the order book become considerably thinner between 10:15 and 10:30am, which was an outlier compared to yesterday's thick trading.  Also, the OVX index (VIX for USO), not exactly a barometer of industrial user trading activity but an event stream that captures funds in the equity space attempting to gain WTI exposure, tested 1 standard deviation below the 20-day Bollinger Band a few days ago and held above this level before putting in the highest % change of the month in today's trading.

Additionally, reports came out today that Saudi Arabia/OPEC+ was considering increasing output in July, which aligns with bearish implications in my last post.

I would expect CL to easily take out those targets with further support at $62.40 and $61.85.

CL update - short-term bearishness, longer-term crash probable

Like I had mentioned in early March, "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..."  This hedge fund buying continued the rest of the month with hardly a significant pullback blowing past the 200-SMA, and reports came in early April that hedge fund buying had stepped into crude oil in late March leading into the upshot rally into the mid 60s now.  Because the market has rallied without much pullback on mostly OPEC+ rhetoric and delivery on supply cuts especially in response to global growth projection downgrades, the market is increasingly susceptible to a pullback in an overbought state in light of abundant global storage.

Rig counts and satellite/mobile data sources have shown a spike in future shale oil production over the past few weeks taking advantage of lofty spot prices.  It seems that this market is extremely susceptible to bubbles and as these hedge funds inflate it while the longer-term ample supply fundamentals reassert themselves amid increasing US supply, it's not difficult to predict another crash by Summer.

Yesterday, a Saudi energy minister said they are comfortable with their level of supply cuts at this point, a change in tone compared to all of the rhetoric heard earlier this year.  And in March, OPEC+ decided to forgo their next meeting and wait until June to decide on further production cuts.  Today, the IMF downgraded global GDP from 3.5% to 3.3%.  So there is reason to believe the market will react negatively to these two developments.  

Of course, EIA reports the inventory number tomorrow which has been leaning toward surpluses lately and the crack spread was trending higher last week while there was a resumption in the oil tanker traffic off-taking exports in the Houston Shipping Channel post-benzene spill.  So there is some reason to believe the inventory build may be less than last week which is not entirely bearish.

Additionally, XOP's RSI(7) fell more than 10 points today which has led to further downside 1-2 trading days later every time this happened since January predicting we will take out today's lows in the May contract in that timeframe which goes against the recent pattern of 6/8 most recent trading days did not take out the previous day's low.  How about a first target of $63.25, then $62.85?