Crude Oil – The Bears Rising

The New Year 2016, proved to be just a number for crude oil bears as nothing emerged as a challenge that could interrupt their electrifying party. For bulls, it was of course a disastrous start to the new year as unfavourable events kept coming in the last fortnight too, thus propelling the rise and rise of bears in this game of gaining control over every aspect of the ‘fuel of the fuels’. The return of the bearish tsunami in Chinese equity markets in last week’s concluding half once again triggered selling in crude oil and ultimately resulted in the breakdown of the most crucial support at $32. Worries over China even engulfed the geopolitical tensions arising in the Syria-Iran belt, which were cautiously monitored through a political tussle between US, Russia and France in the region. So what do all these mean?

Things are changing at a fast pace for an average commodity trader who is finding it difficult to gauge the impact and survive by trading on both (buying-selling) sides. He (the average trader) now needs to possess some extraordinary sense, if not information, to at least make an impact since he is now finding himself trapped in a world where intraday or short-term trading is losing its ground. Now, he needs to prepare himself to be able to hold a trade for a reasonable time and strictly not try for quick small swings. It is thus a new beginning for him and he needs to concentrate on the mid to long-term perspective.

Let us analyse the challenges and find a strategy for trading in crude oil this year:

OPEC Policy: Any change in OPEC policy regarding production cuts may support prices for the mid-term. But other challenges like rising inventories in the US must also be kept in mind. If OPEC decides to go for a cut, the US may start to flush supplies at a much faster rate.  So, the strategy for trading must not be kept very short term.

China-led recession-2: It is now clear that the wounds in China are far deeper than they are presently seen by experts. Thus, the worst is still not over in crude oil & base metals. The strategy should be to keep a tab on financial market activities in China plus a watch on economic data releases. Any negative number from China after a relief rally in future should be strictly taken as a bearish signal for the long term as the negativity will push the oil back to its primary trend.

Geopolitical tensions: Traders will have to adopt a new strategy to deal with geopolitical tensions-related swings. The new way is to not give importance to every small happening. Plus, every negative event must be viewed through a mid to long-term perspective as the number of such events and happenings will only rise every time.

Growth outside US & Iranian Oil: US has shown a strong recovery last year BUT the same is not with the rest of the major powers. So, another challenge would be to deal with the situation of gauging the recovery in other countries. If economies in Euro zone and India shows robust growth, then only we will see return of bulls in crude oil. The issue of Iranian oil flooding into the market has been already discounted.

Conclusion: Let us face that-a big chunk of a negative trend in Crude oil is still remaining. After recent breakdown below $32, we may see prices extending the fall towards $28-$25 and even $22. So, till these targets are achieved, the strategy must be to look for a decent rise towards resistances and take short positions with mid to long term view.