The equity markets strong rally yesterday to close positive on the day, after having been down nearly 25 points. The S&P held its ground through the overnight session, even with the Chinese stock market selling off sharply another 6.5%, to come within striking distance of the low put in when it crumbled two weeks ago over 20%. The market in general does tend to get numb to issues in this same fashion. Were this to have happened last week, it most likely would have taken our markets down with it more substantially. However, like with the Greek stories, Russian aggression against the Ukraine or any other fundamental economic or geopolitical event that has run its course, the US market is able to, after some initial market reactions, properly compartmentalize these events rather than trade dollar for dollar with every development.
It is important to note that the more an issue is bandied about, the more headlines are written about said issue, the less market impact it will tend to have. No truer words have been spoken than when looking at the energy market. For crude oil, the oversupply, glut of inventories mantra has inundated every aspect of energy market reporting. While it is true that there is a significant amount of crude these days, that picture hasn’t changed in the way that the headlines would have you believe or justify a 30 percent decline in pricing. Furthermore, this glut of product theme has persisted with little acknowledgment of reduced US inventories for 5 weeks now. Therefore, it is entirely possibly that the price discovery will, like the equity market has shown it can, become numb to an event or occurrence that has, in the past, had significant price discovery ramifications.
It is with this in mind as we go into the next two days of inventories with the WTI contract sitting on the 6 year low shelf, with an eye toward finding a bottom, particularly if the inventories continue to show larger than expected draws in supplies.
Yesterday, the options for the September contract expired right at the pivotal 41.85 level (settled 41.87). Many technicians felt that a settle below 42 dollars would produce some follow through selling, especially with the depressed China stock markets overnight move. The fact that we didn’t get an extension downward to new lows could be considered mildly bullish. At a minimum, it does highlight that there may be more and more market participants looking for a supportive level in which to get long should we start to see any more signs of a recovery higher. Generally, we will see this develop, contrary to popular belief, just as reports are surfacing of significant upticks in shorts levels and/or larger than normal traffic in put options.
Natural gas continues to defy all odds by maintaining this 35 cent range that goes back to early June. In fact, for the entirety of 2015, the range is only about 60 cents. That is very tight with two thirds of the year elapsed. Today, it is trading on the low end of the three month range and about 10 cents above the yearly low. We would have to go back to 2010 and the fracking revolution to find lower pricing. Longs at these levels would appear attractive, but with tempered expectations, as any price action above 3 dollars has been hard to achieve and even harder to sustain.
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