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Update 2: 2/13/2015 - 18 Days (14 Trading Days) Since Trade Inception
Just about 3 weeks after we initiated our long trade on WTI Crude, we are now long with 2 legs on our overall complex. The first entry was at $44.70, the second was established on 2/11/2015 at a price of $49.50. At the current prices of circa $52.50, we are up approximately 17.4% on our first long, and 6.06% on our most recent long; resulting in a net floating gain of 13.39% on an average entry of $46.30. Our second leg was half the size of our initial position, in accordance to our risk metrics.
Our stance remains clear, we are bullish prices until our primary objective is fulfilled. We will contemplate scaling our of our position when a spot price of $55 is attained. Technical levels indicate to us that $53.87 on spot needs to be take out before more upside can be achieved. The fundamentals have more or less been in their status quo but we note financial media outlets have been ratcheting up their rhetoric on the subject at hand as of late.
Update: 1/3/2015 - 9 Days (7 Trading Days) Since Trade Inception
9 days after we initiated our long trade on WTI Crude, we are up approximately 14.09% in absolute terms. Oil prices (both WTI and Brent) have staged a rather strong rebound despite media calls and punditry for lower oil prices.
Our trade has seen a good deal of skepticism from the investment community, however it is of no matter to us because the market has been proving us right so far; and proving the bears wrong.
The trade unfolding in line with initial expectations and is on target to fulfill our interim goal of $53-$55, where we would consider scaling out of the trade or liquidating the position entirely. Part 2 of our initial in-depth analysis on this trade will be published shortly.
A couple of points we wish to highlight:
- US DoE commercial inventories increased more than expected last week by 8.9Mbbl to 406.7Mbbl, the highest in 80 years. Prices were generally unaffected by this announcement, supplanting our thesis;
- On Monday, at least 9 major US refiners saw their workers go on strike, taking about 10% of total US refining capacity offline. This has generally bolstered prices
- US oil and gas majors have started reporting earnings this week with Exxon already seeing upstream earnings fall 29% and revenues fall by 21% from a year ago
Long WTI crude oil at $44.70
We initiate a trade to long WTI crude oil at $44.70 spot, 26 January 2015. As we go to print, the position has been established on the OTC market by way of contracts-for-difference (CFDs).
Our interim target lies indiscriminately between $53-$55 on WTI. We have not yet established a definite stop loss level but will do so in a future update.
We remain highly convicted to this trade, although there is a chance of moderate drawdown and volatility.
Our position should closely trace the price performance of the continuous (rolling) cash contracts traded on the CME. Below, we briefly outline the main points and motivations for our trade. We are not calling for a reversal; what we are calling for is upside. How much upside, if any, is anyone's guess.
- We entered (on the long side) into a contract-for-difference on WTI crude oil tracking the price performance of the CL cash contract. This is how we gained our desired exposure
- Our interim target lies indiscriminately between $53-$55 and is not definite. In the event that prices nears this area, we will act accordingly to manage our trade
- There is no clear stop loss as of now, but initial calculations say $42-$43. Prices should bot breech the lows of $43.80
- Assuming $53 upside limit and $42 downside stop, this trade has a minimum Reward:Risk ratio of 3.35 (18%:3.5%)
- Our time frame for this trade is a few weeks to 2 months at the longest
- All price levels attached to the trade are technically derived, although we do not explicitly show this
Regular subscribers will know that we were short Brent crude oil when it was trading around $80 last year. It was one of our best trades (in net returns) for the year, but it was also the worst. Reason being we covered the short prematurely at $67 (in hindsight of course). Yes, we are slapping ourselves every time we are reminded by that. Rude epiphanies indeed!
We usually refrain from making market calls, especially if an asset is strongly trending and the call is contrarian. However, we feel that the energy markets, American crude oil markets in this case, have offered us a rare opportunity for immense potential gains. We have our fair share of experiences with trying to catch falling knifes; an apt description for the global crude oil markets ever since they began their incessant rout a year ago in January of 2014.
Although this note will not go in depth on the dynamics and structure of the oil markets, we will still provide readers with some basis for our trade. A more comprehensive piece will be published slightly later. We have put forth a good deal of commentary on the the topic of oil ever since we went public, but we urge readers to have a look at a succinct schematic on how the rout unfolded.
Below are the key motivating points for this trade:
- In our eyes, there hasn't been a fundamental macro-economic driver to support claims of a global demand slump many have been espousing; in fact, the US economy is set to record a stellar 2014 in terms of GDP growth, in a year where WTI fell from $110 to $55
- OPEC's updated strategy to maintain production and indicate price-inelasticity no where near accounts for the surge in supplies/inventories that sub-$50 prices portend
- Increase in Iraqi oil production and exports has been more than offset by decline in US production
- Sub-$50 prices will unarguably bolster demand, hands down
- Firings and layoffs full steam ahead in US energy sector, US production already significantly lower as profitability slumps
- Baker Hughes rig count still declining precipitously, latest at 1633 vs. 1900+ at the highs
- Sentiment in the futures and options market has shifted by a magnitude we deem significant
- 'Word on the street' opinion and consensus remains bearish on prices; almost everyone agrees that prices will stay low
- Goldman's (and others) recent $25/bbl price forecast just did it for us
- Saudi Prince's comments on not seeing $100/bbl prices "ever" again is a tell tale sign of an over-egged market in our eyes
- Death of Saudi King means nothing for country's policy on energy production and exports
- Technically, price action has been conducive for a pullback at the least
- We chose WTI instead of Brent because the former trades at a deeper discount