I guys, this is some though about a general oil trading approach. Would be glad to exchange with you
The goal of this post is to tackle different aspects I find important in oil investing. What trader or investor should know and where to look at. But each point in there could be way more developed and should be used in a proper context.
Chart on
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(1) A multi-factor approach
(2) Observations about oil
(3) Oil Investing basic approach
(1) Multi-factor approach
Oil is wonderful for the generalist trader. Depending on your investment horizon, you have to weight different elements and signals before taking a decision, as for me it generally goes this way:
Short-term: importance of chart analysis / technicals
On the short-term oil is a very volatile asset. But there are strong and “respected” indicators that can sometimes help. I often use technical analysis in a ranging market or “slow” day, without any important news or data release.
What I use the most: support & resistance, Bollinger bands, RSI
Ex in this trade, indicators where showing overbought conditions, and it turned out to be profitable: 13.12.2016 – OPEC Deal fallouts: Short Trading Opportunity
Medium-term main risk: geopolitics
Major risk when trading on a week or month horizon is that unexpected event happens in the world.
I.e: war in Middle East, riots in Saoudi Arabia, sabotage in Nigeria, Trump tweets
On the long-term fundamentals tend to keep things balance and if there are no huge change in amount of supply/demand linked to the peculiar event the price action has time to mean-revert.
On the short-term the risk is lower (day trading, scalping). But always there
Long-term trend: Fundamentals
Commodities investing is all about demand and supply on the long-term. Why did we recently experienced a 70% drop? US Shale oil disrupted the fragile balance in the oil market.
The importance of the US Dollar
Oil is traded in dollar. As a result, it is inversely correlated to this currency.
This inverse correlation is especially clear when there is a long-term trend. In 2003 – 2008 the dollar was in a sustained bear trend while crude oil witnessed one of its strongest bull runs. Then the trend changed direction at the same moment during the financial crisis: rally in dollar and fall in oil.
Yet on the short and medium term this correlation may not always hold. The context and/or other news may drive oil prices regardless of the direction of the dollar.
(2) Observations about oil
Seasonality (US)
Spring: usually lower demand. Indeed refineries schedule their repairs during this period, roughly 25% close
In May the maintenance season ends -> refinery oil process increases -> stock level decreases -> price increases
Decay in Producer Data / Production Data
In the US for instance, we have been assisting to a fall in oil rigs in 2015 , yet the production began to fall in the second semester of the year. There is a latency period to take into account
Oil loves Great Movements
Oil has been historically prone to impressive upside/downside move
For instance, over the past 30 years (except for current), oil has experienced 6 big lows, and all were in V-shape (see graph above).
(3) Oil Investing basic approach
Technicals on the short-term
Look for: trading range, support and resistance on the short-term
Consider
fundamentals on the long-term
On the long-term Even if you identify a strong technical signal, a fundamental signal will have the upper-hand.
When to expect volatility: fundamental data such as production, rig counts or inventories data
Volume usually increase a lot around those release. Hard to trade and can break a trend.
Usually main drivers of the prices.
Sentiment: Commitment of Traders report
To see open interest in oil futures. Good indication of market sentiment.
Sometimes really useful when adopting a contrarian approach.
Geopolitics: the x factor
OPEC meetings, Russia, Iran sanction-related meeting, Trump declarations…
Another example thoughts:
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