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Crude Oil Searching for Direction

Published 05/26/2015, 08:33 AM
Updated 07/09/2023, 06:31 AM

The WTI crude market continues to remain tethered to the 60 dollar price level trading slightly lower throughout the holiday session and into the US morning markets. The Memorial Day holiday was uneventful from a market perspective as participation was very limited, as expected. Today's session does feature a glut of market data that could have significant impact on price discovery across the commodity spectrum. Durable goods and housing data should speak to the demand factor as continued optimism needs to be verified by economic data.


The 60 dollar price magnet of late has led to many US producers ramping their production back up according to Goldman Sachs. As shale production comes back online due to better pricing and modified production cost structures, we could find that renewed focus on supplies may once again drive the price discovery. As the decline in price forced many shale producers to reduce their online rigs, Fridays Baker Hughes (NYSE:BHI) rig count data showed only one new rig going offline. This slowing trend appears to be the precursor to a fundamental shift that could bring more of the significant US sidelined rigs back into the fray.


In other supply side news, it seems that the China National Petroleum Corp (CNPC) has made a major discovery of a new, untapped source of crude that could, once developed, change the landscape of Chinese import/export ratios. With China being the largest energy importer globally, any change in her foreign dependence could have an impact on demand side price discovery, though this fundamental factor most certainly won’t be felt in the market until further out in the future.


Traders are looking for a litany of different information to gauge when and where the price discovery will move next. As with any market, the coiling tighter pricing begs for a break out in one direction or another. Analysis of fundamental developments is the most important factor, though when the fundamentals become stagnate, many traders will start to look to relationships across commodity sectors for possible indications of future market direction. These inter-commodity relationships can be tentative at best, warranting a warning in getting to fixated to the tick for tick nature. Consider how fickle the relationship between the US dollar and crude oil pricing can be. Currently we are seeing, due to lack of individual and new fundamentals, an inverse correlation drive pricing (when the dollar rises the crude sells off). While this can be helpful in the moment, it is difficult to divine any real market direction based on this fleeting phenomenon.


Natural gas has somewhat unexpectedly declined over the long weekend, seemingly in a reaction of the past several weeks attempts at a significant rally. With the market currently trading in the mid 2.80s, it would seem likely that further follow through to the upside could be had following today’s option expiration and rollover to the July contract. Natural gas tends to march to its own fundamental beat as weather and seasonal influences play a much larger role in its pricing and can, therefore, rend itself almost completely form the direction of the energy complex as a whole. Midterm pricing should, following this test to the downside, find new life to the upside once the natural pressure of expiration is in the rear view mirror.

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