Beware WTI's Dead-Cat Bounce
Saxo Bank | Oct 08, 2015 11:17AM ET
Background
The current recovery in oil prices will prove to be nothing more than a short-lived affair, a "dead-cat bounce" if you will. I just do not see the reason for a sustained recovery in crude.
There was some price support earlier this week as the market digested reports of a rise in demand and fall in supply. However, I sense this week’s action is not much more than profit taking as short are covered and some in vain bottom fishing.
Source: www.investing.com, Spotlight Ideas
The chart above shows that the mere fact that spot for WTI is above the 50 day moving average (50dma) is of little significance as the self-same pattern appeared in February.
One may ask what else has supported the crude complex; certainly the drop in the USD ahead of the release of the minutes of the Federal Reserve's most recent policy meeting, has to be taken into account.
The fact of the matter when it comes to the oil market is that the world just has too much supply and even if the prices were squeezed above USD50/barrel it would not last long and soon prices would be back to challenge the USD40/b mark. I say this as data shows that oil production from the Canadian province of Alberta is starting to rise again so offsetting any decline in US output.
As the Canadian dollar has fallen so the cost of production in Canada has declined therefore ameliorating some of the high production costs. Canadian oil is starting to come from the “tar sands” projects and so supply will expand between now and 2017.
These are large cap projects that can deliver 500,000 barrels per day. This are already starting and these will not be terminated.
WTI 5-Year Chart:
Source: www.investing.com
One other reason why I am looking to sell into strength is that in the last few days the front of the market has altered. WTI spot i.e. oil for prompt delivery was trading at a premium … now it negative, i.e. WTI for prompt delivery USD48.855/barrel and November is USD48.44/barrel.
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Management And Risk
Parameters
WTI Currently November 2015 CLX5
Entry: Sell on an approach to USD50.00/Barrel Target USD49.22/Barrel
Targets: 48.35 … 44.97 … 41.60 … 38.60
Stop: 54.00
Time horizon: Medium-Term (2 Months)
— Edited by Clemens Bomsdorf
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