As projected by the International Energy Agency (IEA), oil supply will continue to outpace demand for the fourth consecutive year, driving stockpile accumulation into 2017. Technological advancements have allowed producers to extract oil at record high rates even though demand is suffering.This oil glut is creating emerging market currency outflows from producers and suppressing inflation in developed markets.
It remains to be seen whether the recent agreement to an output freeze by OPEC members holds true.
Against this fundamental backdrop i have detailed a crude oil checklist below and attached the relevant documentation.
Economic Activity – measured using Global PMI’s as indicator of growth
EIA Inventories – US crude oil stocks
Production – US oil production
Futures positioning – forward curve and COT
US Dollar – DXY and ADXY
Global Services PMI’s are making slow and steady progress reporting 51.6 in September, up from 51.3 in August.
Over the third quarter as a whole, the rate of expansion was the weakest since the final quarter of 2012.
Global Manufacturing and Services PMI’s came in stronger on the previous month at 51.7.
Despite coming in above the neutral 50 level, the expansion remains relatively subdued compared to its long run average.
Global Sector PMI’s show growth in financials whilst industrial’s posted a weak increase in output following Augusts contraction.
The cumulative view from the above PMI’s shows stagnant to low growth globally.
Crude oil stocks are increasing after 5 weeks of consistent draw downs.
Crude oil production has fallen since 2015.
Crude CFTC positioning is at highest level of longs in over a year
Largest net long positioning of major instruments covered
413.7k net long contracts as of 11 October 2016.
US Dollar breaking to upside of two year range, bullish in nature
In conclusion, four out of the five variables in our crude checklist are favorable towards a short bias in crude oil going forward.
Economic activity as measured by the Global PMI’s gives us a tepid signal of growth.
From a technical perspective, the MACD is exhibiting a moving average crossover and a histogram divergence.
Price printed higher highs whilst the RSI shows a double top formation.
I would short the WTI contract using the following price points:
Target 2: 44.39
Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.