Is it too late to short, or long on correction…

Since early October, oil prices have lost around a quarter of their value as supply soars just as demand is expected to slow down along with an economic downturn. If not short in the high 70 level on Brent Crude, the feeling of to late for cake is the case.

Over the last weeks, I have noted out an oversold market in technical terms, but the fundamentals looks bearish as the demand slows down, the sanctions against Iran is not the headlines in the Newspapers and we have seen an increase of oil production over the last months to compensate the output from Iran.

It was some articles in the Norwegian Newspaper DN yesterday, which are all very confusing, no clear direction.

  • Headlines: “Fearing oil price above USD 100”, this when the oil price is collapsing. Arguments are good if you are looking 10 years ahead, but there is no hold in the statement of a long position today….
  • Headlines: “A certain form of weathering and schizophrenia”, this one I do agree on, which is also my impression from investors in the market. How can we get a clear signal of where the market will head in the next month to come, when the twitter from President Trump has a larger impact on the market than any fundamental news…

In short term, I do think there is good opportunities to test longs in the lower scale of the curve, but your target should be a bit lower with stop loss set to 1:2 rather than 1:3 with good opportunity for intraday trading.

In other words, I will try a long on Brent Crude after US EIA Weekly Statistics is coming out today around 17:00. The expectation is a build of 2.2 million barrels, if we do see a number close with +/- 1 million barrels, I would aim for a long position.

But, please note, the API numbers from yesterday came out with 8.8 million barrels increase yesterday, compared with analyst expectations for an increase of 3.2 million barrels. Those numbers has been an good indications over the last weeks, so a higher build could be the case and my technical long position would have too strong fundamentals against.

Power, Gas, Emission and Coal: The weather forecast shows continuing high pressure over Scandinavia and Europe. An expectation of cold and dry weather seems to hold for the next 10 days, which would bring strong spot price.

It has been very volatile lately, with strong increase in prices for the winter in combination of a re-bound in Emission prices (CO2) from 16 to above 20 EUR/mt.

How long this weather forecast is going to last is difficult to say, but as noted in earlier comments, the scenario of prices is very wide and very much dependent on the weather. Peak prices up to 80 EUR/MWh could been seen, but as closer we now get to the winter, des more we know in regards to the fundamentals, which at time being are very healthy.

I would say; wait for first indication to build up a short position on high prices, I think the downside could be large, special if we do get a normal to slightly warmer winter than expectations.

Brent Crude January (LCOF9)

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