Firstly, we wish to extend our apologies to our readers for the extended delay in putting out latter additions to our initial piece imploring if crude oil prices have indeed bottomed. We have also made a couple of adjustments since we incepted our first long on WTI crude oil back in January; all of which reflect the ongoing dynamics in the relevant every markets. Our view on oil prices have also been adjusted appropriately from what we have been reading and researching, but most importantly because the market has been telling us something they didn't back in January when the first analysis was conducted.
Secondly, we wish to update readers with the status of our oil trades on this front. We encourage you to view our official piece on the trades for the fullest color, but we will still provide an interim update here. A proper update will ensue shortly.
Details are as follows:
- 1/26: First long on WTI crude oil at $44.70
- 2/11: Second long on WTI crude oil at $49.50 with half the initial notional on position
- 2/16: First long on WTI crude oil squared at $52.70 for net gain of 17.89%
- 2/19: Second long on WTI crude oil crude squared at $49.88 for net gain of 0.66%
- 2/19: Rotated into Brent crude oil at $58 shortly after all WTI positions exited
- 2/20: Brent crude long squared at $59.50 for net gain of 2.56%
We are currently flat on direct exposure to crude oil
What we expect
All investors and traders have expectations, collectively forming the nebulae of the markets. In this sense, we will write a short note on our expectations for oil prices going forward. The bottom line is we see some downside to prices on both Texas Intermediate and Brent oil. We also expect Brent to outperform Texas Intermediate for a considerable period of time.
First of all, we feel price action on prices are telling us that we might be in for more rather directionless backing and filling in the following few days to a decline in prices maybe a few weeks to a month out. We won't make predictions on the precise price and timings as it's beyond the scope of this note. A few levels that remain critical the the structure of both markets still sit under the tape and we wait to see how prices react to those areas.
Secondly, it seems there is much more than a dirty Saudi trick at play here. Demand is going to be more or less steady but the build up in US crude inventories has been incessant to say the least; the line goes up in a slope that makes the S&P look like central banks have to double their efforts in the current global easing cycle. With prices above $60 on Texas Intermediate, it is difficult to imagine how glut can be physically cleared efficiently via the market. It can be said the stock of supply has written a very big call option on higher prices. This is why we overperform Brent in any case where we have long exposure.
Next, we have learned from experience that in most cases "never on the first bounce" applies to market routs where prices have plunged as ferociously as 50% in less than 10 months. When we put our our first oil piece, what we were espousing was we believed prices at $45 were the lows, but that doesn't necessarily equate to instant upside. We see a test of sub $47 levels on Texas Intermediate as fully possible. What should be eyed is the reaction from those levels, that will provide insight to the state of the market and whether prices are ready to head higher for good or remain in a moribund range.
Adopting a wait and see approach is possibly a prudent choice at this juncture. If we get low enough prices that match our risk metrics we will establish long exposures. If not, bullish price action is needed. Regardless, our primary price target on WTI oil has been met ($53-55) on the last run up. Dips should be bought with caution. Tactically speaking, we are fine with shorting WTI once key levels are taken out. $54 on WTI has proven pivotal on a technical basis.