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:
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.
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.
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:
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.
Here is a live 6 month version of that chart which will change as the oil inventory report comes out.
OK, if you hit the link to the standard chart set, the oil company stocks look like they have started to move. Time to dig in to oil companies in a bit more depth and probably a decent time to pick up some international oils. I’ll do a deeper look at them a bit later in the week (or folks can chime in here).
On this chart, the energy commodities (other than KOL coal) look to have started nice runs. Even natural gas UNG is off the bottom. So energy commodities (other than coal) in play too. It could end fast (if it is based on Iranian fears) or it could ‘have legs’… We’ll see. But oil and energy move fast, so don’t expect this to be “buy and hold” action.
I need to look at the oils and oil service companies in more depth. Time to be in energy (and perhaps all commodities?) and probably a bit late on the entry as I was doing “other things” with V1 vs V3 and security… That being one of the problems of trying to be a part time trader. It gets boring and you get distracted, then “miss the exact moment”. But this is likely “good enough”.
It is helpful to at least check the “one stop” chart on a regular basis to catch such things early.