• Dragostin Kozhuharov

WTI Short Trade

I entered a short trade on WTI with an average price of 41.44. The reasons behind this trade are both technical and fundamental, so let's have a view of my decision making process.


FUNDAMENTALS:


Inventories - On Tuesday we had the API crude oil inventory release. It showed a significant drawdown in inventories of -6.829m vs a forecast of only -1.2m. This in theory should have been bullish for the price, but in terms of the price reaction immediately after the release and the following day, I didn't see much appetite for the price to move to the upside.


Yesterday we saw the release of the EIA inventories report which was the following:


Crude oil inventories -10.612m vs 0.352m*


Cushing Crude oil inventories 1.309m vs 0.426m*


Gasoline inventories 0.654m vs -0.733m*


Refinery utilisation 1.6% vs 0.5%*


Crude oil imports -1.013m


*actual vs expectation


What we can see on the headline number is that the inventory drawdown from Tuesday gets confirmed by the second report on Wednesday, it's actually even bigger. Again if we look at just these numbers, it looks bullish for the price. I am however more interested in the other metrics which show weaker demand. Especially the gasoline inventories, summer is normally the time of the year when demand for gasoline is the highest. However, due to Covid 19, we are seeing build up in gasoline inventories. At the same time refinery utilisation is going up with headline inventories going down. This means that unless we see a pick up in demand for gasoline, we can see this inventory going further up.


Peak demand


My personal view is that we saw peak demand for oil and gasoline in the US earlier this month around 4th July holiday. Since then we have seen higher cases of Covid and some social distancing measures being reintroduced + peak number of cases in some of the states with the highest demand for gasoline.


Long story short seeing the numbers for gasoline, cushing inventories and crude oil imports made me take the short as I believe that they directly contradicted the picture on the headline numbers. If anything these numbers show that demand for crude and refined products is weak during a traditionally strong season for demand.


For the ones looking for a more long term trade, the above mentioned peak demand theory this summer combined with OPEC bringing back some production from August, we can see some pressure on oil prices in the coming months.


TECHNICALS:


WTI Daily Chart


Looking at the chart above we can see that WTI was in a strong uptrend until recently when it entered a resistance zone between 40 and 42.50USD per barrel. From a technical perspective we can see that there is no appetite for the price to go higher at the moment as we aren't making higher highs anymore. This could be a signal that this recent uptrend is exhausted. So far we don't see much appetite for downside as well, but the price has consolidated above 40USD.


This is the reason why I entered within this consolidation zone. For a more short term trade, I am looking for potential downside to 40-40.50.


If I see momentum to the downside, I can see potential profit targets of around 35-37USD per barrel.


OTHER FACTORS


Monitoring the US dollar is also a part of this trade as Crude oil is priced in USD. If we see a continuation of the downside for the USD, this will not be helpful for our short trade, as USD weakness usually pushes oil prices higher. If we see some dollar strength, this could help Oil to break below the 40$ per barrel mark.

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