WTI Crude (CL) Futures Market, and What is Happening. BS Debunked

As I type this, the WTI front month crude oil futures on the CME Globex is trading at 54.25$ per contract. Symbol is CL, active month currently trading is January:  CL 01-15.

Pretty much the whole world has watched as crude has sold off from the 100$ level to what is now a price threatening 50$.  The transfer of wealth over this period has been monumental. if not historical. Moreover, the selloff represents a major shift in the economic power structure of the world, and it has only taken 6 months.

Here is the story that the media is floating as being the reasons for the selloff:  https://www.msn.com/en-us/money/mutualfunds/why-oil-is-down-by-half-what-it-means-for-you/ar-BBgPQdy

I am an active futures trader, and everyday I trade Crude oil, gold, natural gas, and the mini s&p.  From my vantage point, nearly every reason outlined in the story concerning the pricing of crude oil is complete BS.

Point/Counterpoint on the topic, reasons for the decline in crude oil value from the article:

1)  "A drop off in Global demand".  There have been no "unexpected" fluctuations in global demand for crude oil. It is true that China has been the horse pulling the wagon as far as demand goes for sometime now; and yes they are facing some tough economic times as their real estate bubble is thought to be popping, and is "expected" to be several times worse that the US real estate market failure in 2008.  STILL, China's government is actively securing crude oil supplies from anyone whom will deal with them.  Also, there is some drop off from some smaller players in the global consumption model, but Japan and a few European countries are easily offset by the development going on in Brazil and South America. Demand being down as a reason for global decline in crude oil pricing is complete BS.

2)  "Excess Supply"   This idea that there is excess "supply" hitting the market all of a sudden is also a fallacy.  Supposedly the excess supply is coming mainly out of the Bakken region in the Dakotas, Eastern Montana, and central Canada  as a result of Fracking operations.  I have worked in the Bakken, and have seen it first hand back in 2012.  Even then, it was estimated that there would be 1 million barrels per day coming out of the region by 2015.  Well guess what?  At last count there was 900k barrels per day being generated (if you can ever depend on an estimate of that nature), and it is nearly 2015....on par with the other fracking operations in North America.  This spike in global volume was priced into the market years ago; the Bakken and central Canada shale oil is no surprise to anyone whom follows these markets, and is not the reason for the precipitous price fall in crude.

3) "The Supply/Demand Argument in General"   In essence, the Supply/Demand explanations for the sell off are bedtime stories that are supposed to ease the common investor's mind.  I am sorry, but we live in a new age of finance. The old models of traditional finance do not apply.  It is a time of unbelievable leverage, huge pools of capital which are mutually exclusive from one another, and electronic markets that are opaque in nature; in reality it is very difficult to find out whom is doing what in the market with any sort of timeliness. Selling feeds selling......and the big boys around the world are selling crude oil.

What has happened:

1) CL has been sold off heavily in 2 phases. From 9/30 to 11/20 we moved from the 95$ range to 75$ range.  From 11/21 until today we have moved from 75$ to the low $50's.

2) This selloff in CL mirrors the sell off in Gold (GC) from a few years back. Anyone remember when Gold was at 1880$ per ounce.  It was sold off to 1100$ in short order, and now trades at 1200ish.

3) As with the Gold selloff, the small oil producers have taken a bath, especially in the fracking operations that are prevalent here in north America.  Simply put, it is too expensive to frack....with prices currently in the 50's for a barrel of oil, it is costing the producers an all in cost of nearly 10$ per barrel OVER MARKET PRICE to bring crude out of the ground.  The small guy is sunk.

4)  Big oil isn't realizing the same losses. Remember that it is legal for these guys to trade their own products (in a speculative manner) in the derivatives markets. Shell, BP, Hess, Exxon....these firms can secure financing and take short positions in order to profit, and cover losses from operations.  So, while it appears that anyone in the oil business is taking it hard, remember that the shorting of CL on a large scale can simply make these firms more cash heavy, and actually still profitable.

5) OPEC is also not taking it in the rear.  Remember, the infrastructure in the middle eastern oil fields is old (rebuilt after gulf war 1), and largely paid for.  The Saudis are huge players in our  derivative energy markets. They will simply limit production, and ride the wave by shorting.

6) Russia is taking it hard. No way to sugar coat this one....energy production is the entire economy for Russia. (80% energy based).  A few guys at the top will pocket any monies to cover themselves, and the workers will be left to starve....much the way it has always been in Russia.

So, WHY has this crude oil sell off taken place?

1) Institutional money is taking an intermediate term short position.

2) Individual traders around the world are pounding every technical level to the short side, nearly every day.

3)  The big players in the world wide oil markets have decided that it is time to trim the fat and consolidate the market even further (the players are OPEC, Shell, BP, Exxon, Hess, Russian czars), which isn't so much behaving in a sinister fashion, as it is them protecting their own interests.  This sustained selling will eliminate small drillers and producers, put the squeeze on certain eastern block countries, and may spell the end of Fracking here in north America for the near term. Basically, profits will be returning to the entities whom have always demanded them.  Basic boom and bust.

So, where are we going, and what does it all mean?

1)  IF CL prices stay low, then the US economy will continue to rise. Industry across the board will grow domestically, and consumers will be in a position to spend more of their newly increased disposable income.

2)  The Fracking operations in North America will be greatly downsized.  The wells are drilled, but the infrastructure surrounding them is insufficient.....basically, there is an ocean of shale oil in the Bakken, but no way to quickly and cheaply get it to market.  Those wells will lay dormate until price returns to a profitable level.

3)  We will see sub 2$ gas in the US, IF CL prices stay in the 50's for the near term...until the end of January. The low gas prices will prompt government action in the form of increased gas taxation. If consumers are used to 4$ gas, 2.50$ all in pricing with a 75cent gas tax included will look like a good deal. Subtle taxing 101.

4) Sustained, low energy pricing will ensure the growth of Equities. The dow will hit 20,000 if we enter a prolonged period of depressed energy pricing. 

5) As for a market call on CL, I would expect a direct test of the 50.00$ per barell level on CL.  Historically, the whole world will be going long on Crude at the 50 level.  The common call for the bottom will be 50.00$ even. Personally, I think the bottom is going to be in the 40-45 range, followed by a sharp spring time rise back to the 75 level.

As always, anything can happen. A terrorist attack on a large scale will blow this market up nearly overnight. One thing is for certain......these are ideal conditions for day trading Crude oil, and there are many small traders that are cleaning up.

If you are in the market, then best of luck, and I hope you have been able to get on the right side of this monster sell off in WTI Crude.

Quote Originally Posted by Lucrative:

Very good read


Could not agree more with many of your points. I have had the same conversations with a landman buddy of mine. He (as well as others in the fracking industry) feel this is a play to squeeze out the smaller operations (notably the North American producers). It's just business, plain and simple. The big dogs can afford to take a small short-term loss while they consolidate their control of the world market.

It's a shame for US shale operators; I really feel this was a 'manifest destiny-eque' step in ridding ourselves of dependence on OPEC and other abroad energy supplies. Not to mention the boost of economies in somewhat depressed areas of this country.

Interesting to see how this pans out, but I think you make very valid points of the situation at hand.

As for long-term plays on the market, are there any 'big oil' players you would recommend investing in?


 

It is a real shame what is going to happen to the region in which I live, western Montana. Most of the guys here lost badly in the real estate crash of 08-10 and ended up going to work in the Bakken...and many of them make a good living; the layoffs will begin in full force Jan 1, and there won't be much for the guys to do around these parts...just have to stay tuned.

I will be the first to admit that I do not know much about trading stocks, picking stocks, or taking option plays; most of my expertise lies in trading futures on commodities,  so I won't even venture a guess on which big oil firms are the best play.

If I were going to make a move on an oil stock, I would have to fully research the company-specific accounting practices of the stock in question as it pertains to their speculative ventures into the energy derivatives..... these guys are masters of "creative accounting" in and effort to create positive stock price valuations.

I guess it comes down to finding a bottom. A good illustration of an oil field support company that has had its stock crushed over the sell off is Halliburton. I worked there in 2013, and the stock was sub 40$....rallied hard to 75$ and has subsequently sold off in concert with the crude selling. It will be interesting to see what happens to that stock in particular.......many of the employees are heavily invested in the company through the company stock plan. Most of the supervisors were making more on the stock appreciation than their own salaries. I imagine that there has been an abundance of intra-company selling on this ride down.

FWIW, CL is trading at 56.65, and looking to trade over yesterday's high of 57.15. If it trades above yesterday's high, then that will be the first time in 17 sessions going back to 11/21.  With that break, we will see many stops getting run, and may break a bit to the upside....with the FED meeting later today, anything can happen.  Key # to the bull is the 38% retracement of the current trend on the daily CL chart...trend will be over if we trade 6286.

Gold also poised for a dump under yesterdays low at 1187.7...FOMC meetings will tell the tale.

I got off on a bit of rant there in the middle. Been awake for awhile this week.

The speed of electronic trading never ceases to amaze me. 

57.16 launch point at yesterday's high....hit at 9:55 mountain time....the market explodes to the bull.   Print 58.98 in 1 minute 36 seconds.

Day traders stops were just run......black box momentum algo's kicked in and ran price up 182 ticks in nearly a flash.

We live in interesting times.

I agree wallstreet.... the FOMC announcement on rates today at noon keyed substantial pressure to the downside.  Amazing volatility really.....if that kind of volatility was present everyday in crude, then this would be a much easier game.

I like 45 to 40 even as a potential long term bottom......longs have to get shaken out under 50 before we make a directional move back towards 100$.  Timing a long term play is something else altogether.....

Anything under 40$ may just trigger the hyperinflationary period that most doomsday prognosticators have been predicting.......not because cheap energy is a negative to our economy, but because sub 40$ crude would be an unprecedented input into our modern economic model.

Dirt cheap crude oil could be classified as an outlier........ no one that I have heard predict oil trends has called for 50$ crude...most experts would have bet price would be more natural at 150$ than 50$.

A highly leveraged equity market, depressed job market, and runaway government spending...all paired with unprecedented low energy prices? We can all guess what will happen, but no one knows just how things will unfold.

Just have to wait and see.

We rolled over to the Febuary contract as being the front month on crude last week. 

Compression pattern on the daily chart, looks like 55.55 is a number the computers like to trade.

At this point, I am watching last week's low at 5393. I have a sell signal at that price...we may see some holiday shenanigans by the Asians and Europeans while no one is looking here in the states...it is very possible for a considerable move either way; personal bias is to the bear.

If we trade under 5393, we could see a test of 50.00 even either tomorrow or when the markets open for Friday's session. FWIW I will be scalping to the short under 5393. 

Just have to stay tuned, like always.

Febuary Crude looking at 51.00 right now....low of day at 51.06...a move under 50$ looks to be a possibility in the near future.

A print of 49.99$ is going to shake out a TON of longs.  It will be interesting to see when the big boys step in and bid this market; a rapid drop to 45$ even is a likely scenario if we take out the 50.00 level.

There have to be buyers in the weeds somewhere......

49.95 session low on Febuary CL.......day traders squeezed out...heavy volume right under 50.00. 

Bullish bounce back to 50.50; we will have to stay tuned on this one. 

If you would have told me that a barrel of Crude oil would have traded at 49.99 last fall, I wouldnt have believed it. Wow.

All aboard, next stop 44.

Selling owns the day again...doesn't seem to be anyone out there that can stop the bum-rush to the bear.

CL is currently trading at 48.02, session low at 47.74.  We may see a run at 47.50 or my low range number at 47.35 on the close today.

Does anyone care to venture a guess on what a world with Crude oil trading in the 30-40 dollar per barrel range will look like?

Lows from the end of 2008 will be tested. Eventually the big players will cut the dividend. Maybe use some money to buy small companies for cheap.

Not sure we see a bottom until someone stops pumping oil from the ground or Russia has a change of heart on Ukraine.

No reason to bottom fish yet.

Well, here we go...... CL trading 4840, and a bullish pennant forming as of the old pit open on the 30 minute chart. 

FWIW 4999 and 50 even are the new BFRN's (Big F*cking Round Numbers)....I look for huge volumes both ways in that area.  Key fibby at 49.99....38% of the high on Jan 2 and today's current low....I will not be long this market until we trade under 45$ per barrel.

I agree with Wall Street...when the big dogs flip the switch you will see 75$ crude; 75$ is a necessity when looking to profit fracking.

The new media talking points on the subject of cheap crude are interesting. https://www.msn.com/en-us/money/markets/how-dollar50-oil-changes-almost-everything/ar-AA7RCMh

I do not disagree with everything in the article (somewhat atypical).  Part of the article does speak to the point I was making above about the low energy prices tipping off a hyper-inflation scenario.....of course not for the reasons they outline, but more to the point of such low crude prices being an "unkown unkown" and the players in this game behaving in more unpredictable fashions.

This week is big......some huge profits will be made on trying to locate a proper bottom. Still looking at potential options plays, and even buying some outrights to cash in later this year.

IMO, we haven't bottomed yet.... I think that there are many whom are going long this market and putting their backs at 4499 and 3999 as stops....they both may get run. I still am  partial to my call of the bottom being in the 40-44$ range. Historical stuff, really.

bigvern,

What kind of option plays were you thinking about?

FIrecontrol,

Admittedly, I am not an options expert...but buying Crude outright futures contracts is a major capital allocation....I like the September CL outright contract a lot right now; trading 53 ish with next to no volume. That trade could be worth a bundle, but the equity required to take a drawdown could be in the 12-14k range..and that is if you bail out at 39.99. Basically, the options should give an investor a cheaper way in to a similar trade, with a smaller, somewhat fixed liability.

I am looking at some July, August, or September calls....strike price around 50-55.  In wait mode right now; looking for my bottom to come in, or confirmation of where we are headed.  January is a huge month in this regard.

Honestly, these options are a bit pricey right now, but worth it.  Realistically, you would have until May before you would have to make a decision either way regarding position size.

CL should hit the 75 range this spring and summer...and possibly will return the 90-105 levels.

When the institutions decide to bid Crude, price will explode to 75ish, and then we will compress...who knows from there...75 brings profit back into the shale plays, and that may be needed if fracking and shale is to be the future of the world's energy.

In any case,  I worked a daily buy signal above 4932 for a few bucks last night;  Gold is showing some strength, so there are more than a few guys looking at that inflation scenario developing in the US economy.  All in all, we should see a test of 50 again in the near future...still extremely bearish towards crude.