WTI futures trading was wild on Thursday, even by the standards of the somewhat volatile nature of oil. One of the things that makes oil appealing to traders is that while there is this short-term volatility, it is generally part of a discernible long-term trend based on fundamental conditions. Thursday’s trading, however, reflected conflicting fundamental conditions and we saw the kind of price action that frequently marks a change in long-term direction. This, and the common view among analysts that oil is going higher before too long, may give the impression that we are on the verge of reversing and moving higher. I do not agree.
Thursday’s intraday chart shows three moves of a few dollars or more, up, then down, then up again in a period of less than twelve hours. And, as I took this snapshot at 2:50 p.m. EST, it looks like an upswing may be starting. Like I said, crazy, right? This is however understandable, as oil is pushed by opposing forces.
The early morning rise came as OPEC suggested it would consider production cuts at its next meeting. This just highlights the fact that while oil prices have fallen quite dramatically from their highs, supply has remained tight. The prospect of reducing this supply to what is at best a balanced market based on current consumption has led to an understandable acceleration.
Then, just before the U.S. markets fully kicked off, there was…
WTI futures trading was wild on Thursday, even by the standards of the somewhat volatile nature of oil. One of the things that makes oil appealing to traders is that while there is this short-term volatility, it is generally part of a discernible long-term trend based on fundamental conditions. Thursday’s trading, however, reflected conflicting fundamental conditions and we saw the kind of price action that frequently marks a change in long-term direction. This, and the common view among analysts that oil is going higher before too long, may give the impression that we are on the verge of reversing and going higher. I do not agree.
Thursday’s intraday chart shows three moves of a few dollars or more, up, then down, then up again in a period of less than twelve hours. And, as I took this snapshot at 2:50 p.m. EST, it looks like an upswing may be starting. Like I said, crazy, right? This is understandable, however, as oil is driven by conflicting forces.
The early morning rise came as OPEC suggested it would consider production cuts at its next meeting. This just highlights the fact that while oil prices have fallen quite dramatically from their highs, supply has remained tight. The prospect of reducing this supply to what is at best a balanced market based on current consumption has led to an understandable acceleration.
Then, just before U.S. markets fully kicked off, there was a jumble of data that once again hinted at economic issues.
For starters, weekly jobless claims were below expectations. That’s generally a good thing, but in the current environment, it was seen by traders as evidence that despite continued rate hikes, the Fed is still struggling to control inflation. This view was then reinforced by revisions to the second quarter figures which confirmed a negative imprint on GDP and showed the Fed’s preferred measure of inflation, with core PCE still rising at an alarming rate. So any hope of the Fed reversing course, much like the Bank of England did on Wednesday, is gone, and they look set to continue raising rates despite two straight quarters of GDP contraction. This raises the specter of stagflation, economic stagnation and inflation at the same time. Then, during the trading day, the focus shifted back to supply, then demand issues took over again as US equities crashed, etc., etc.
You can see the problem. The supply and demand of the price equation send completely different signals, with traders being caught in the middle and not knowing what to do. Over the past few days I’ve heard several analysts from major Wall Street firms give their thoughts on crude and they all seem to be saying the same thing: that volatility will pass and when it does, supply restrictions will force WTI to rise again, likely above $100.
However, stepping back and looking at a longer term chart, we are still in a discernible trend, and for good reason.