Daily Brent chart, March 2011-July 2014
One thing I find very attractive about the oil market is the tendency of price to evolve around ranges and to respect strong supports & resistances
- (1) Historical examples
- (2) Concerning the current situation
(1) Historical examples
- On the long-term
As you can see on the chart above, 2011-2014 can be an example for a long-term range in oil price
- On the medium-term:
Daily Brent chart – May to December 2016
- On the short-term
Hourly Brent chart – 05.10.2016-28.10.2016
It is possible to find trading ranges and to exploit them on different time frames.
I like those trades as I think there is a little less risk. If you place trade based on range, you either buy (relatively) low or (relatively) high.
Two tricky things:
- hard to notice on the moment
- range are not always holding, on the charts above you can see some breaks on the upside and on the downside (which happened to be nice trading opportunities for trader aware of those levels)
(2) Concerning the current situation
- The $1m dollar question: what is the new range for oil price post-OPEC deal?
Post-OPEC deal we are in an interesting period. From the second chart (Daily Brent chart – May to December 2016 ) you can see that we broke the resistance and that price is currently consolidating above the previous range of $44-$53. What does it mean? Are we going down as we are near the upper limit? Is there a new trading range in formation?
My personal view: the trading range was “moved” a little higher. The OPEC deal hasn’t really changed the fundamentals yet. So I think Brent should now find a strong resistance at $57-$58, and should find support at the $50 level.
This is just a guess, but the idea behind the deal for OPEC was to put a floor on oil price without making it rise too much (because of US producers ready to pump at max). They were looking for a better range (and more sustainable for them in oil price).
- Why the market in currently in a range?
The support & resistance are self-fulfilling prophecy: a lot of traders are looking at those levels and that’s why they are holding. Currently it seems there are a lot of short-term players in the market, attracted by its choppiness and themselves participating in this choppiness.
Investment firms including Cohen & Steers Inc., Credit Suisse Asset Management, Union Investment and Columbia Threadneedle Investments said they would likely add exposure to oil if prices fall to $40 or lower and reduce exposure around $50—effectively betting that the current price range will hold.
OPEC wants oil to stay in a range
OPEC says a price near $60 will avoid added shale production
Iran’s oil minister Bijan Zanganeh said he and others in OPEC are hoping to get the oil price between $50 and $60 a barrel — low enough to keep “rivals from raising their output
US Production: new swing producer.
Shale producers are hedging their output as soon as prices climb to a range of $50 to $55 a barrel, allowing them to continue drilling and increase their production.
The technological improvement make the US production very flexible, going out of the market when prices drop and in again when prices rise back.
The buffering power of shale oil producers on the oil price has been prominent in the last months. Whenever it has fallen towards its lower limit, it has strongly rebounded, as the lower level renders too many oil fields unprofitable and hence it is not sustainable for long. On the other hand, as soon as the oil price goes over $50, too many producers rush to hedge their future output at that level (actually at a higher price thanks to contango) and thus all the rallies have proved to be short-lived.
- What to expect?
On the shorter-term, we can also find a trading range
Hourly Brent Chart – 9.12.2016-22.12.2016
You can see on the chart above where we at right now. As $57 is the new upper limit, I currently think that we are going to test the lower (short-term) resistance.
I think the resistance is way stronger than the support, as when oil prices rise, at some threshold price probably north of $55 per barrel yet well below $70, new production will again be profitable and will come online faster than in the past, this pushing back prices