« November 2017 »

IVolatility Trading Digest™

Volume 17 Issue 46
Crude Oil Uptrend [Charts]

Crude Oil Uptrend [Charts] - IVolatility Trading Digest™

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After a brief comment about the S&P 500 Index this week's Digest is devoted to updating WTI crude oil including our take on the Commitment of Traders report from the Commodity Futures Trading Commission including a look at seasonality and a United States Oil Fund, LP (USO) trade idea to consider.

Review NotesS&P 500 Index (SPX) 2578.85 slid another 3.45 points or -.13% for the second weekly decline. While still well above both the 50-day moving average at 2547.34 and the upward sloping trendline, USTL from last November 4. A modest pull back underway early last week ended Thursday on tax reform and positive earnings news. While some indicators retreated Friday most all were positive Thursday except for breadth but its rate of decline slowed noticeably Friday.

And two important updates for those closely following along each week.

Day weighted VIX futures premium 11.81% near the bottom of the green zone.

McClellan Summation Index (Breadth) 308.41 down 7.51 on Friday as the rate of decline slowed although the weekly decline of -171.87 was the largest since the top at 929.82 on October 16.

The pullback underway early last week was cut short by tax reform news along with earnings reports and M&A activity helped some by seasonal strength in November and December although tax loss selling may continue in the weakest sectors.

Because our last look at WTI crude oil from the perspective of the Commitment of Traders report was several week ago and while it continues trending higher, now is the time to catch up.

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Crude Oil

breadthWTI Crude Oil (CL) 56.55declined -.19 or -.33% basis December futures for the week including a 1.41 point or +2.56% gain Friday. The chart shows Friday's reversal along with the operative upward sloping trendline from the June 21 low at 46.08.


Commitment of Traders Report

From the Disaggregated Commitments of Traders - Options and Futures Combined report as of November 14 "Managed Money," the group that best correlates with crude oil price changes and arguably the most important, increased their long position adding 12,567 contracts while reducing their shorts +19,339 contracts for a net position increase of +31,906 contracts representing 9.93% of the open interest up from 5.00% for the week ending August 29, 2017.


Now 349,712 contracts vs.147,303 contracts for the week ending August 29,2017.

Typically Producer/Merchant/Processor/User, (Commercials ) or "PMP" are net short contracts as producers hedge production by selling futures contracts and then delivering crude against their shorts at expiration or if the price declined, buying back short contracts for a gain and buying cash crude for delivery. However, since processors and users are also included in this category their buying partially offsets producer selling resulting in a net short position.

Shown as a percentage of open interest the chart below shows a declining net short position since peaking at 12.03% on April 19, 2016 when cash crude was 40.91. Now 2.25% vs. 1.44% week ending November 7 or -79,346 contracts vs. -50,870 week ending November 7.


Either producers are unwilling to sell production forward at current prices or they have already hedged all available production while demand from processors and users continues to rise as they hedge against future price increases. Alternatively, increasing Swaps short interest while PMP short interest declines suggests producers are increasingly using Swap Dealers for hedging. Now 15.74% vs. 14.96% week ending November 7or -554,540 contracts vs. -526,841 week ending November 7 and -384, 064 contracts on June 10, 2014 when WTI was 106.85.


The U.S. Energy Administration, EIA claims Swaps represent producer hedging along with PMP. When combined their net short position as a % of the open interest looks less dramatic than PMP declining or Swaps increasing net short positions. Now 17.99% vs.16.40% week ending November 7 or -633,886 contracts vs. -577,711 contracts November 7. Compared to -465,956 contracts or -21.03% on June 10, 2014 when WTI was 106.85.


In This Week in Petroleum dated November 15 the EIA included a reference guide to help understand the participants.


The article detailed how crude oil ETFs were contributing to increasing open interest generally interpreted as a sign of trend strength, either up or down. As of November 14, WTI reached a record high of 3,523,062 contracts compared to 2,216,023 on June 10, 2014 when WTI was 106.85.

In addition, it explained fund mangers of commodity ETFs are registered commodity pool operators and classified under the Money Manager category.

Declining crude oil inventories due to production cut backs by OPEC and others often called NOPEC, evidenced by both Brent and WTI futures trading in backwardation, when the front months are higher than the deferred months, are cited as one reason for increasing crude price. OPEC has a meeting scheduled for November 30 to discuss extending the cut backs and it could become a "buy the rumor sell the news" event.

Another widely followed indicator is the Brent premium over WTI that began on August 18 from 2-3 over to 6.17 above WTI, on Friday. Initially thought to reflect increasing global demand and perhaps a risk premium it was clarified in a November 17 RBN article by Delia Morris Longneck Bottle - Brent Versus WTI Differential, Pipeline Bottleneck explaining maxed-out pipeline capacity from the Permian to the Gulf Coast as the real culprit behind the wide differential since the difference between Gulf Coast crude like LLS averages just .35 below Brent.

From the Managed Money and WTI PMP & Swaps charts above it appears more like price equilibrium with Managed Money gradually increasing their long position while PMP & Swaps representing hedging, gradually increasing their short position before the OPEC meeting on November 30.

Seasonally crude oil prices typically decline in the Fall reaching a low in late December before rebounding in Spring. However the price chart above shows this has not been a typical year, at least so far. The test will come after the November 30 OPEC meeting that could trigger profit taking.

Here is a five year seasonal chart for USO, the US Crude Oil Fund ETF showing an average decline in December of -5.6%.


Short-Term Crude Oil Trade Idea

Based upon the above here is an idea to consider.

United States Oil Fund, LP (USO) 11.35 down .07 or -.61% for the week after making a pivot low of 11.02 on November 15 and then turning abruptly higher Friday.

With a current Historical Volatility of 19.26 and 16.03 using the Parkinson's range method, the Implied Volatility Index Mean is 23.71 at .02 of the 52-week range. The implied volatility/historical volatility ratio using the range method is 1.48 so option prices are moderately high relative to the recent movement of the ETF. Friday’s option volume was 161,730 contracts with the 30-day average of 94,420 contracts with favorable bid/ask spreads.


At .50 and in-the-money with a small premium above the ETF price the delta is .6858. The plan is to close it on or before November 29 to eliminate any after OPEC meeting sell off risk. Use a close back below the November 15 pivot low at 11.02 as the SU (stop/unwind).

The suggestion above is based on the ask price Friday. Monday’s option prices will be somewhat different due to the time decay over the weekend and any ETF price change.

StrategyWith more indicators turning positive on Thursday than those remaining in doubt, odds have increased that the overdue pull back may have been completed last week. Accordingly, unless the SPX declines early in the week consider reducing or closing hedges including call credit spreads.


The market outlook improved enough Thursday to conclude the expected pull back may have run its course, presuming breadth shows signs of improvement this week, since November are December are usually good months for equities. With earnings reporting mostly complete, going into the November 30 OPEC meeting the focus will likely be on crude oil prices for the next two weeks.

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Next week will include an update of our Foremost Indicators including crude oil.

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The strike price for the USO suggestion should be 11 not 17.


Posted by Jack ( on November 20, 2017 at 03:07 PM EST

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Our purpose is to offer some ideas that will help you make money using IVolatility. We will also use some other tools that are easily available with an Internet connection. Not a lot of complicated math formulas but good trade management. In addition to Volatility we use fundamental and technical analysis tools to increase the probability of success and reduce risk. We prepare a written trade plan defining why the trade is being made, what we call the "DR" (determining rationale) and the Stop/unwind, called the "SU".