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Key Crude Oil Price Break a Durable Trend Change Going into Doha?

Key Crude Oil Price Break a Durable Trend Change Going into Doha?

John Kicklighter,

Talking Points

  • US Oil prices Tuesday rose above the 200-day SMA for the first time since July 29, 2014
  • Crude volatility, volume, open interest and options activity signal extraordinary interest
  • Fundamentals in supply-demand are key, including the Doha meeting scheduled April 17

See the DailyFX Analysts' 2Q forecast for US Oil along with their favorite 2016 trading opportunities on the DailyFX Trading Guides page.

Oil spot prices this week closed above the 200-day moving average for the first time in 445 trading days – breaking a record ‘bear trend’. Is this the cue for a systemic trend change? Crude has risen more than 15 percent since hitting its February lows, but the pressure of the incredible bear trend over the past two years requires considerable conviction to overturn. A shift in the bulging supply-demand imbalance will be crucial to deciding the market’s winds. Rumor and conjecture of an OPEC and non-OPEC agreement to curb production at this weekend’s Doha meeting (specifically Sunday, April 17). No agreement will likely delay bulls’ recovery.

As we keep a vigilant eye on the fundamental swells, it is also important to keep track of the market’s price bearings, sentiment and positioning. This article will focus more on the price and exposure aspects.

A Critical Technical Move

Oil prices have held to a general bear trend since mid-2014 with critical bouts of exceptional selling momentum. Throughout that drive, the market has been held under the moving water mark in the 200-day moving average throughout. With the tentative recovery beginning after the 7-year low set on February 11, the market overtook the 50-day moving average on February 22 and quickly followed on the 100-day moving average on March 7. The break for the higher time frame average called an end to the longest stretch of relative market weakness on record. The charts below show how remarkable this development is visually.

Oil Market Activity Levels

A technical development alone isn’t likely to change the bearing of the broader market – turning trends takes exceptional effort and participation. Market activity and positioning will play a crucial role in this effort as well. In the first chart below, we have the US Oil overlaid with the CBOE’s volatility index for the commodity. While not perfect, the two are inversely correlated – in large part due to the hedging interest from the long side of the market. The lower peak compared to 2009 and the retreat in insurance costs offers some reflection of investor sentiment settling rattled nerves.

The next step is to take a look at how retail traders are positioning in the commodity. The Speculative Sentiment Index (SSI) showing CFD traders from FXCM reflects upon a group of market participants who generally maintain a shorter-term trading view on the market. As can be seen below, the ratio of long to short interest has oscillated wildly with the increased activity, but underlying the data is a tremendous rise in interest from those traders looking to profit from a bearish downshift. In fact, the bearish interest is currently at a record high.

Futures traders often reflect a materially different mentality on speculative positioning. While there are plenty of short-term oriented traders and those prone to beginner trading mistakes, the professional interests balance them out. Below, we can see the net large speculative positioning of futures open interest. The bearish shift never followed the intensity of price. And, the recent swells in to net long territory with price upswings were more significant.

Looking more objectively at futures positioning, we further see the impact that recent developments in bearing has done for volume. Trading activity has increased persistently over the past few decades, but it is interesting to further note that the dive over the past two years has engendered far more turnover than the far more volatile plunge during the Great Financial Crisis.

Volume has dropped sharply from its peak high – which happens to coincide with the market low – which shows greater connection to the ‘retail’ trader than other measure may indicate. However, when we look more closely at general participation in open interest, we find that lower activity doesn’t mean less interest. The initial bear trend kept traders engaged, and the tentative reversal hasn’t simply encouraged a shift of focus to other assets.

Market Directional View from Options?

Options are an active trading instrument unto themselves amongst major underlying markets, but they can also contribute a speculative view to their underlying. Below, we find the US Oil prices set against the level of open calls and puts in the market - bets for or insurance against a rise and fall in the market respectively. In a world of lower yield, we have generally seen appetite for these instruments as a curb on possible losses generally drop compared to the period through 2008.

Looking on a comparative basis, however, we get a more distinctive picture for expectations or perceived risk on market direction. Below, we see the net exposure between calls (bets or insurance on a rise in markets) and puts (bets or insurance on a fall in markets). Since May 2015, the speculative view of a rally – or hedge appetite to offset a sudden rise in price for consumers – surged. The record imbalance not surprisingly peaked near spot’s low.

The Oil Opportunity For FX Traders

For those FX traders that don’t also trade the USOil CFD or futures, there is distinct exposure to be found in a strong correlation with USD/CAD. While this correlation is not fixed and maintained through a number of points of shared influence (US Dollar pricing, trade, risk exposure), its general connection is remarkably persistent through time. Below you can see crude prices overlaid with the inverse of the traditional USD/CAD pairing (CAD/USD) as they naturally maintain a negative correlation. In other words, the Canadian Dollar rises against its US counterpart when oil prices rise; and vice versa.

Compare how retail speculators are positioning in US Oil relative to USDCAD to see if there is shifting current using the FXCM Speculative Sentiment Index (SSI) data on DailyFX.

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