Heading into last week, oil had a head full of steam and momentum from the previous week which had been its best of the year. As we traveled through the week though, the momentum quickly stalled as traders sifted through mixed inventory data in what seemed like another repeat of the theme all year. Glimmers of hope for oil bulls were fleeting and quickly lost in a maze of mixed inventory data that continues to provide headwinds for any move north in price.
Supply is still the dominant theme
The market has struggled to find balance since the shale boom in the US, and last week’s data was another clear example of that. We remain below the ten-year US production trend line, yet supply is not being worked down quickly enough. And we remain at risk to return to that trend line which could have a dramatic downward impact on price over the long term.
Looking at the short term weekly data, while production and inventory levels persist near record highs, we see signs of inventory being worked down, and demand picking up which is important data for short term binary options traders to consider.
On the positive side, last week’s Energy Information Agency (EIA) inventory report delivered data representing the 5th consecutive weekly draw. U.S. crude oil refinery inputs averaged a record 17.4 million barrels per day during the week ending July 28, 2017, 123,000 barrels per day more than the previous week’s average. Importantly, Gasoline inventory decreased 2.5 million barrels which is a signal of increasing end user demand.
On the negative side, questions are surfacing as to whether oil and gas stocks are depleting fast enough, given the normal seasonality that is expected during the typically high consumption summer season. Gasoline production dipped last week, and while crude inventory’s dipped by 1.5 million barrels, that was under market expectations for a draw of around 3 million.
Other economic factors are in play
With its central place in the economy entrenched, oil continues to be influenced by many other assets, especially the US Dollar.
Last week was a dynamic one for the Dollar. The greenback has been in retreat for many weeks now, but last week’s nonfarm payrolls report offered a significant bounce to close the week.
Oil and the Dollar have long enjoyed an inverse correlation over wide time horizons. As the world’s reserve currency, a weaker dollar provides more purchasing power in global energy markets for consumers. There have been protracted times where the correlation fades due to asymmetric fundamental factors, such as early this year when the Dollar rocketed higher primarily due to US political expectations. But in broad terms, a weaker dollar is fundamentally constructive for oil prices.
The inverse correlation seems to have re-emerged as strong as ever over the last two months.
In looking more closely at the last 50 trading days, a linear regression indicates a strong relationship between WTI crude and the value of the Dollar.
A key consideration for binary option oil traders is their expectations for the moves in the Dollar. If the Dollar reached a pivot point last week and continues to lift, this could provide a dampening effect for any expectation of an upward trend in crude.
As the primary driver in contemporary energy markets, oil is closely linked with other key indicators and forces in the global economy. Other indicators oil prices are inversely correlated with that should be monitored in the near-term by short term binary oil traders include Treasury rates. Within such a fluid environment, as traders scan multiple markets, understanding how a move in one asset class could potentially impact others is a possible extension for an existing trading strategy.
Multiple fundamental forces playing a role globally
There is an OPEC meeting on Monday and Tuesday in Abu Dhabi to discuss compliance. In normal cycles, this would pose elevated levels of event risk for traders. However, one of the most noteworthy elements of this cycle is the rather anemic impact of OPEC on current pricing dynamics. While OPEC has been active and events should always be closely watched, we do not see elevated levels of event risk for a short-term binary trader this week due to OPEC or other geo-political players.
In other oil hot spots, Libya and Nigeria continue to ramp production and contribute to the supply concerns in the global market. Traders should also monitor Venezuela in the background for potential impacts due to economic sanctions related to political events that could limit oil exports from the country.
Potential Price Scenario’s for the week
Long term, we remain bearish on WTI crude. For this week, we could see an extension of the move higher we saw on Friday continue early in the week. As we move through the week, we could see a return of a familiar refrain with mid-week inventory reports adding uncertainty to the mix for traders. Due to the high seasonal expectations for a continued drawdown, anything short of a major draw in crude inventory might not be enough to lift prices. It is challenging to see a basis for a major draw however, as all historical and current input data is pointing to another tepid draw amounting to less than 1% of total stocks.
An exponential smoothing econometric model tuned to current data and factors points to an active price environment traveling between the upper $40's and a range of 50.30-50.70 through Tuesday.
Ultimately, there is an elevated probability for a possibility for an overall downtrend for the week and our base case remains an expectation for the possibility of a weekly close trending below the important $50 level on Friday. Importantly though, multiple scenarios remain in play. We could receive news of further OPEC compliance measures and a surprise in the weekly draw as counted by the EIA of more than 5 million barrels from oil inventories. A conflation of those events could drive oil to a daily close above $51 and place WTI prices in a new range well above $50 for the first time in months.
However, given the established cadence of the week in oil markets, the econometric model sees the possibility of the wave cresting early in the week and rolling back through the upper $40’s to close out next week due to the pattern of historical trends and current conditions.