Energy Humpday

Every Wednesday at 1 PM Eastern the U.S. Petroleum Inventory Report is issued. That’s 10 AM Pacific. Some data is released at 10:30 AM Eastern. When holiday schedules happen, the actual day of data release can shift. It’s one of those “mostly this day, except when it isn’t” government things… The web site is here:

http://www.eia.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html

Usually oil drifts down a little going into the report as folks are exiting positions prior to whatever happens. Sometimes, if a lot of folks are short oil, prices will rise prior to the report. Typically, whichever way it has drifted, at the report it moves the other way. Not always, but often. Why? Folks establish new positions. More of them were “right before they exited”, so resume their prior position.

The use of protective options also has this effect. If I’m “Long” a lot of oil, I can buy a “put” to protect my position prior to the Oil Inventory Report. Folks buying a lot of “puts” cause the brokers to do a “conversion”. A conversion means that they sell the underlaying contract and provide the put. They also buy a call to cover their short position. Now they are “short” oil, so if it gets “put” to them, they don’t care. Yet they have a call, so if oil goes up, they can “call in” that oil to cover their short. The net effect is that they (the broker selling the put) have no risk from the movement of oil, but net sold oil short. This can push the price down. So just a lot of folks buying “puts” to protect profits in a position can cause the market price to drop due to selling pressure from the brokers doing a ‘conversion’ to cover their risk in selling the puts.

http://www.theoptionsguide.com/conversion.aspx

That link talks about stock options, and using the inverse trade (buying the underlaying, selling a call and buying a put); but the concept is the same. This is why a brokerage house, like Goldman Sachs, can sell 20,000 puts to someone and not worry about taking on the risk. For the average Joe, the commissions on all this would be a pain. For the broker, they don’t have to pay themselves a commission… so it’s easy for them to do.

At any rate, there are forces that cause the emotional “worry” of folks going into the announcement to be reflected in price, and when the worry leaves, prices move back (in whatever direction from which they came.) UNLESS, the announcement confirms the “worry”.

So it’s often a dicey moment in Oil and things like gasoline and heating oil futures markets. Often a price will spike one way, then wobble right back the other, as folks think through what an announcement really means.

For that reason, I’m putting up this posting ahead of the announcement. I may make some comment after the announcement if something especially interesting happens. Frankly, though, the USA is not the be-all and end-all of the world oil supply and consumption, so our inventory levels are not nearly as important as they were back in 1950… Most often, it is speculation about the meaning that moves things. If folks were expecting a build in inventory due to business slowdowns, and suddenly there’s a shortage instead, there will be worry that business is taking off and not enough oil is around. Similarly, if business is good and the inventory is surprisingly high, the worry will be that maybe business is not so good after all as not so much oil is being demanded. (This ‘flash panic’ often ignores things like someone shutting down a refinery to convert from heating oil to gasoline, or a load of gasoline being shipped to gas stations ahead of a holiday. After some reflection, the price may suddenly run the other way on some realization like that. It makes trading oil ETFs interesting, if dicey…)

A generally OK strategy is to take a position into the inventory report, then sell out of it on Friday. Why carry it over the weekend if it is likely to start reversing on Monday / Tuesday as the next report approaches? Again, not an ‘always thing’, but a useful rule of thumb. Professional traders don’t like to carry positions over the weekend anyway, so if they all went long on Wednesday, they would like to sell out on Friday; for example. For longer term trend trades, these wobbles can let you time slightly better entrance and exist points. So, if folks all jumped on the long side on Wednesday, you can expect price to start weakening on Friday, often reaching a low point Tuesday Evening / Wednesday Morning. So you buy cheap in a rising trend. Say the trend runs a couple of weeks, then the best “sell” point would be near Thursday (before the day traders exit Friday).

Again, it isn’t always that way, but on average it adds a bit of gain. When oil is falling, those points reverse. Shorts cover leading into the report, so oil rises a bit into Wednesday, then usually falls on high inventories as the shorts reestablish positions (or sell to close their protective calls). Friday some will ‘cover their shorts’ and price will stop falling and sometimes rise a bit. Just upside down from the prior trade.

That means the first thing you do is figure what the trend is; then you time the entry for that trend trade based on the patterns described above. Every so often the inventory report will be a big surprise and cause a reversal of expectations. Sometimes the Strategic Petroleum Reserve will buy, or sell, a load of oil and surprise folks. Every so often a hurricane will disrupt things, or a war will break out, or someone in the Middle East will kill some other folks; and oil will spike or plunge on a ‘surprise’. If you trade oil contracts, expect surprises. It’s part of the turf. This last week the exchanges raised margin requirements unexpectedly and oil took a big hit. It happens.

I have a posting with the “standard charts” for oil and energy ETFs at this link:

https://chiefio.wordpress.com/2012/01/01/oil-and-energy-stocks-and-etfs/

It has a longer description of the various ticker symbols and more variety of things in the charts. The charts here will vary based on what I find interesting in any one week.

These charts come from BigCharts.com and you are encouraged to go there directly and learn to set the indicators yourself. That way you are not dependent on me to make charts.

One Year version of the chart below at BigCharts.com.

This is a static chart as of 8 May 2012. You can click on it to get a larger much more readable version.

Oil and related products vs SPY Benchmark 8 May 2012

Oil and related products vs SPY Benchmark 8 May 2012

USO  -  US Oil - treasuries ETF with oil futures 
SPY  -  S&P 500 Benchmark ETF
KOL  -  Coal ETF (has miners and equipment makers)
UNG  -  US Natural Gas- treasuries ETF with natural gas futures
UGA  -  US Gasoline- treasuries ETF with gasoline futures
UHN  -  US Heating Oil (tied to Diesel and Jet Fuel in production)
        - treasuries ETF with heating oil futures

OK, the main ticker here is USO, an oil Exchange Traded Fund. It will not exactly track crude oil, but it is what I can trade easily in my stock account. First thing to notice is that after a few months run up, the last two months have been a shallow downtrend (not too bad given what the stock market has been doing). At the end, though, it takes a tumble. That was where margin requirements were raised and the Saudis said they would pump more oil.

Next look at that plunging red line. UNG Natural gas. Sure looks like it hit a bottom and bounced off. Probably a good time to go shopping for cheap natural gas companies at a bottom. That’s the “dead cat bounce” when shorts cover. Usually (though not always, especially in commodity markets) there will be a return to the simple moving averages from above, then the final run up begins. This is happening faster and without the ‘retest’ of the lows; so a riskier entry. Still, it’s a nice clue of a possible bottom fishing opportunity.

The other stuff has rolled over as of about middle last week. Notice the last couple of price bars? Small things (low range, low volatility) and with a little ‘tail’ hanging down. Prices dipped, but couldn’t hold the dip, closing above the lows. That’s called a ‘Kangaroo Tail” and like Tigger, prices often bounce away from the tail. That would argue for a ‘short cover rally’ if the inventory report is that there isn’t a lot of inventory. It can also just mean folks didn’t push prices much in the last couple of days as we wait for the report… As that often is the case, I’d vote for “treading water prior to oil report”…

Just above that red line is a yellow dropping line. Coal. Facing very strong competition from natural gas in the USA. With China having announced a slowdown (and trying to buy a Mongolian miner… so shopping for minerals elsewhere) that demand is off some too. Add in the Obama administration trying to kill coal fired electricity with regulation strangulation and, well, not a time to be in coal. Yet… Expect railroads that haul coal to be under pressure too.

Above the USO price is the UGA gasoline price. It had gotten well above crude. That’s a high “crack spread”. Lots of excess profit to oil refining. Now notice that it’s dropping back toward the oil line. Refiners to be making less profit in the future, so when they announce great profits from the past quarter, don’t expect their stock price to “pop” as folks will have already seen the crack spread narrowing…

Heating oil, the red line, is falling too, especially with a warm winter back east (where they use heating oil) and with summer on the way.

Now when the inventory report comes out, those lines will either plunge more, on way high inventory, or rise smartly, on lower than expected inventory, or wobble and go nowhere, on expected inventory and / or confusion in the news.

“The trend is your friend” would say they are all in a downtrend, so the best you can expect is a ‘return to the SMA stack’, and that’s a day trade at best. Personally, I’d just stay out with this look to things.

The indicators?

Notice that about 2.5 months back RSI touched 80 right at the top. That was the last call to exit. Not a lot of confirming “lower highs” on wobbles in oil. It just moves. Though looking closely about March 1 you do get a tiny blip up that is the ‘confirming exit’ lower high in RSI.

MACD had been above zero, but generally trending down (losing strength) and there really wasn’t much reason to be in oil from December on through to February. It was mostly flat. There was that one nice run in February (where MACD was “blue on top” and with a nice upslope to it) and that was about it. Now MACD is “red on top” and below zero. Very much a ‘be out’ indication. The opening is “mouth down” and just not showing any reason to expect a reversal any time soon.

DMI was ‘blue on top” for the start of the year and caught a gentle rise into February, then went ‘red on top” and stayed there at the end of March. Now it has gone nearly vertical Red on Top. Also saying no reason to be in oil.

So, all in all, the indicators are saying oil is just not your friend right now. I’d expect it to stay that way as long as China is in the doldrums, Europe is in the dumper, and the USA is in confusion. I.E. until about November…

Here is a live 6 month version of that chart which will change as the oil inventory report comes out.

Oil and related products vs SPY Benchmark

Oil and related products vs SPY Benchmark

OK, if you hit the link to the standard chart set, the oil company stocks also don’t look very interesting, nor does nuclear.

FTK Flotek is the only ticker that looks interesting.

Chart here.

and even it looks a bit toppy and slowed.

Coal miners are dropping, but eventually will reach a bottom / value proposition for long term bottom fishing. Just not yet. Nuclear too. CCJ has an interesting chart that looks kind of ‘bottomed’ with price bouncing over the SMA stack and coming back to touch it from above. Yet in a dropping market context a risky time to buy. For long term holders it would be a reasonable time to start watching and take a small ‘marker position’, first step of ‘scaling in’.

In Conclusion

Not a lot of interest. A couple of bottom fishing candidates to research. Watchful waiting for a reversal. Maybe watch the oil inventory report for anything surprising. Ho Hum… The whole commodities sector got whacked on the Europe / China news, so it’s not all that surprising. “Risk Off” so be out of commodities, slowing global economy, so oil too.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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7 Responses to Energy Humpday

  1. E.M.Smith says:

    Draw down in “products” and a build in “crude” with neither being very big. Refiners raising volume of products produced. Not much in any case.

    So prices have… done nothing. As I type the ‘price bar’ tick for today has a ‘kangaroo tail’ out both sides. It’s wobbled up and down and is back at the middle. We’ll see how it closes…

    The RSI value is approaching 20, so likely about as much ‘down’ as it can go at this time.

    The Hourly Chart with volume looks bottomed to me.

    IMHO there’s not much of a trade here. Unlikely to go lower in the next few days, only a little upside available in a down economy context. The “play” is likely in natural gas instead.

    That chart is rising nicely…

  2. E.M.Smith says:

    Looks like oil dipped a bit the last couple of says. Other products (and coal especially) continue to drop hard. Natural gas wobbled, but trend looks mostly intact.

  3. E.M.Smith says:

    crude up 2.13 million bbls in US storage. Oil dropping fractionally, but looks to me like it is slowing (small price bars about the same size and price as prior bars for a couple of days).

    Nat Gas continues to rise, gasoline stable.

    Not much changed from last week in conclusions.

  4. Pascvaks says:

    Perhaps justified in light of the competence of the Federal burocracy, or the common perception thereof, how much do you trust these type of reports (Labor, Ag, Energy, etc.)? I’m personally ‘trusting’ the feds less and less since they’ve been playing by Chicago Community Organizing Gang War Rules. How does the market factor the “integrity” of the current system into the ‘reports’ they get?

  5. E.M.Smith says:

    @Pascvaks:

    The reports on “stuff” like the oil reports are pretty clean. It’s more or less a mechanical act. The only thing I’d wonder about is if someone gets a ‘tip’ early; but even that would show up as unexpected volume in orders or options just before the announcement.

    In general, I think the reports are fair and not manipulated. Too easy to catch the manipulation and too much risk to it.

    Where the real game happens, IMHO, is congressional playing with the definitions. So Ronald Regan changed how inflation is calculated… and we get “adjustments” to the labor numbers for weeks afterwards (months?) that look a bit suspicious.

    So labor reports and inflation reports get a ‘mental adjustment’ in the markets. Oil is pretty much solid as is (but has a bit of slop in it any way as somebody drains tanks prior to a normal shutdown of a refiner to change product mix, for example).

    In essence, the market participants learn which reports are trustworthy and which have ‘fudge’ in them; and learn to ‘counter fudge’. You often hear things like “Labor was reported up by 2% but we know that didn’t allow for the seasonal hiring and will be adjusted down by about 1% next month”. You can get a new kind of fudge past most of the traders ONCE, then they absorb and adjust and it gets “de-fudged”…

  6. Pascvaks says:

    EM-
    Thanks! I find I can’t ‘trust’ much anymore, especially political appointees and elected public ‘servants’ with their own off-line agenda. I fear more and more for the country as I don’t believe we have as many watch-dogs as we once did, nor as many ‘public servants’ with the fear of God in their souls who can even spell the word ‘integrity’. But, on the other side of my brain I hear a soft voice, it tells me “It has always been so; this is not new.”

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