Trading Crude Oil

Trading Crude Oil

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.

Crude Checklist


Economic Activity – measured using Global PMI’s as indicator of growth
https://www.markiteconomics.com/Survey/Page.mvc/PressReleases


EIA Inventories – US crude oil stocks
http://www.tradingeconomics.com/united-states/crude-oil-stocks-change

Production – US oil production
http://www.tradingeconomics.com/united-states/crude-oil-production

Futures positioning – forward curve and COT
http://www.investing.com/economic-calendar/cftc-crude-oil-speculative-positions-1653

US Dollar – DXY and ADXY
https://www.tradingview.com/
http://www.bloomberg.com/quote/ADXY:IND

 

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-services-pmi

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-manufacturing-services-pmi

Global Sector PMI’s show growth in financials whilst industrial’s posted a weak increase in output following Augusts contraction.

global-sectors-pmi

 

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-stocks

Crude oil production has fallen since 2015.

crude-oil-production

crude-oil-production-2

 

Crude CFTC positioning is at highest level of longs in over a year

crude-cftc

Largest net long positioning of major instruments covered
413.7k net long contracts as of 11 October 2016.

 

crude-cftc-all

 

US Dollar breaking to upside of two year range, bullish in nature

.crude-dollar

 

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:
Entry:     50.81
Stop:       51.78
Target:    46.72
Target 2: 44.39

 

crude-chart

 

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