Trading position (short-term; my opinion; levels for crude oil’s continuous futures contract): Hold long position with entry at $59-61, and $51.50 as a stop-loss and $68.10 as the initial price target. There is a decreased probability of big dips for the next few weeks, hence keeping the stop-loss much farther behind is justified.
The early part of this week has been highly volatile for crude oil. With last week’s big fall on Thursday (Mar. 18), there was solid support for oil at the $60 level right up until Monday (Mar. 22). That support, however, turned out to be temporary as oil slid further on the news of partial lockdowns in Europe and a stronger U.S. dollar. Today (Mar. 24) saw a reversal, as the critical sea route of the Suez Canal is blocked by a 400-meter-long container ship. Efforts are on to tow the ship and clear the traffic as I write this. Approximately one million barrels of oil is transported per day via the Suez Canal, so there will be a significant impact on oil supply in short-term due to this incident. As we discussed earlier on Friday and Monday, the fundamentals of supply and demand support an upward pressure on prices. However, due to a historic price rally in oil in the past three months, there are widespread sentiments of uncertainty and loss aversion is making the market react more strongly to bearish news.
From the production perspective, not much has changed except for the U.S. increasing the inventory levels in short term. Overall, we are still in a supply deficit situation. Supply chains and logistics remain at high risk, and as seen from the Suez Canal blocking, can quickly send prices upwards fast. Based on the latest reports, the Suez Canal will be unblocked in the next few hours so it should not have a long-term impact on the fundamentals. This event can act as a hint for us to include supply chain risks, which are more fragile than ever, in our investment decisions.
Demand is expected to be on lower side for sure, because of partial lockdown declarations in the EU. Europe’s share of crude oil consumption is a significant 20% of overall global consumption. Unlike last year’s situation, the impact of this lockdown will be much less severe on oil demand. The duration of lockdowns will be shorter, and economic activity will be allowed to continue. EU leaders are planning to put restrictions on vaccine exports to increase vaccine adoption within the union. The world simply cannot afford to come to a grinding halt economically and we will probably see more lockdowns, but they will be much more diluted in intensity. So, in summary, the increase in demand for oil will continue in coming months.
As seen from the chart above, the price range is becoming wider on a daily basis indicating the high volatility of the market. An interesting event to watch out for in the next few days will be the OPEC+ meeting’s potential revisions to its output policy, along with the Energy Information Administration’s (EIA) weekly Petroleum Status report later today. The Suez Canal blockage issue can also throw surprises as, so far, no meaningful progress has been made in solving this.
To summarize, the market is highly volatile and reacting strongly to short term news events. Keeping a long position is still justified, although we have to account for short-term dips which can trigger stop losses.
As always, we’ll keep you, our subscribers well informed.
Trading position (short-term; my opinion; levels for crude oil’s continuous futures contract): Hold long position with entry at $59-61, and $51.50 as a stop-loss and $68.10 as the initial price target. There is a decreased probability of big dips for the next few weeks, hence keeping the stop-loss much farther behind is justified.
Thank you,
Nishant Jain, MBA, CPSM
Oil Trading Strategist
