Crude oil is getting crushed, but one expert sees year-end rally

CNBC

Oil expert sees oil heading higher after a volatile week for crude

Oil expert sees oil heading higher after a volatile week for crude  

Crude oil just posted its worst week since July as a surging dollar, slowing emerging markets and supply concerns have all weighed on the commodity. But despite the price declines, one commodities trader sees a rally in the cards.

Bill Baruch, president of Blue Line Futures, told CNBC’s “Trading Nation” on Thursday what investors can expect next. Here’s what he said.

· A bearish inventory report earlier in the week pushed oil down to its lowest level since June, but crude bulls still have reasons to feel good. For instance, it’s easy to forget crude oil is still trading near multiyear highs, with a gain of 9 percent year to date and 40 percent in the last 12 months.

· One of the biggest stories weighing on crude may be set to dissipate and take some pressure off the commodity: trade tension between the U.S. and China. We may see meaningful headway on trade over the coming weeks, and fears of slowing growth in China may be alleviated.

· My biggest concern, however, is spare capacity. Saudi Arabia promised to ramp up crude production in July, but it actually fell 200,000 barrels per day. Still, the U.S. estimated that production in the lower 48 states has stalled over the last three weeks, and tighter spare capacity can be extremely bullish.

· During this seasonally weak time for crude, investors should look to buy pullbacks; the technical picture should support this strategy. There is tremendous support from $62.50 to $64.50 per barrel, and oil should be positioned to rally back up to between $70 and $80 per barrel later this year. The key level to the downside would be $62.

Bottom line: Despite a 3 percent decline in crude oil this week, Baruch sees the commodity surging into year-end.

China is reportedly taking the first steps to pay for oil in yuan: Sources

CNBC

  • Annual trade in oil worth an estimated $14 trillion
  • Pilot could be launched as early as the second half of 2018
  • Beijing could start with crude purchases from Russia, Angola

Employees close a valve of a pipe at a PetroChina refinery in Lanzhou, Gansu province.

Stringer | Reuters
Employees close a valve of a pipe at a PetroChina refinery in Lanzhou, Gansu province.

China is taking its first steps towards paying for imported crude oil in yuan instead of the U.S. dollar, three people with knowledge of the matter told Reuters, a key development in Beijing’s efforts to establish its currency internationally.

Shifting just part of global oil trade into the yuan is potentially huge. Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year.

A pilot program for yuan payment could be launched as early as the second half of this year, two of the people said.

Regulators have informally asked a handful of financial institutions to prepare for pricing China’s crude imports in the yuan, said the three sources at some of the financial firms.

“Being the biggest buyer of oil, it’s only natural for China to push for the usage of yuan for payment settlement. This will also improve the yuan liquidity in the global market,” said one of the people briefed on the matter by Chinese authorities.

China is the world’s second-largest oil consumer and in 2017 overtook the United States as the biggest importer of crude oil. Its demand is a key determinant of global oil prices.

Under the plan being discussed, Beijing could possibly start with purchases from Russia and Angola, one of the people said, although the source had no details of anything in the works.

Both Russia and Angola, like China, are keen to break the dollar’s global dominance. They are also two of the top suppliers of crude oil to China, along with Saudi Arabia.

The move would mark a major step in reviving usage of the currency of the world’s second-largest economy for offshore payments after several years of on-again, off-again measures.

If successful, it could also trigger shifting other product payments to the yuan, including metals and mining raw materials.

All three sources, who spoke to Reuters on the condition that they not be named, said the plans were at early stages. Officials at some of China’s state oil companies said they had not heard of such plans.

Crude futures

The plans coincide with this week’s launch of the first Chinese crude oil futures in Shanghai, which many expect to become a third global price benchmark alongside Brent and West Texas Intermediate crude.

Shanghai’s new crude contract is traded in yuan.

Besides the potential of giving China more power over global oil prices, “this will help the Chinese government in its efforts to internationalize renminbi (yuan),” said Sushant Gupta, research director at energy consultancy Wood Mackenzie.

Unipec, trading arm of Asia’s largest refiner Sinopec , has already inked a first deal to import Middle East crude priced against the newly-launched Shanghai crude futures contract.

U.S. bank Goldman Sachs said in a note to clients this week that the success of Shanghai’s crude futures was “indirectly promoting the use of the Chinese currency.”

People’s Bank of China (PBOC), the country’s central bank, did not respond to a Reuters request for comment on the plan. The Ministry of Commerce (MOFCOM) also declined to comment.

Internationalization

China’s plan to use yuan to pay for oil comes amid a more than year-long gradual strengthening of the currency, which looks set to post a fifth straight quarterly gain, its longest winning streak since 2013.

The yuan retained its No.5 ranking as a domestic and global payment currency in January this year, unmoved from a year ago, but its share among other currencies fell to 1.7 percent from 2.5 percent, according to industry tracker SWIFT.

A slew of measures put in place in the last 1-1/2 years to rein in capital flowing out of the country amid a slide in yuan value has taken off some its shine as a global payment currency.

But the yuan has now appreciated 3.4 percent against the dollar so far this year, with solid gains in recent sessions.

“For PBOC and other regulators, internationalization of the yuan is clearly one of the priorities now, and if this plan goes off smoothly then they can start thinking about replicating this model for other commodities purchases,” said the person briefed on the matter.

It would not be easy, however, for China to shift the bulk of its commodity purchases to the yuan because of the currency’s illiquidity in forex markets.

Nearly 90 percent of all transactions in the $5 trillion-a-day currency markets involve the dollar on one side of a trade, while only 4 percent use the yuan, as per a triennial forex survey by the Bank for International Settlements.

One More Leg Up For Crude Oil

Seeking Alpha

Summary

Speculators have set multiple net long position records already this year.

Crude oil’s 13% drop did little to scare the bid.

Crude is heading into a period of seasonal strength.

The last trade in our March seasonal portfolio is in the May crude oil contract. We expect the petroleum rally to continue. Our seasonal program will most likely trigger a buy signal Sunday night. This will make us long both crude and the RBOB unleaded contract. We’ll carry both of these positions through next week when we’ll offset the unleaded. Then, we’ll be long just crude oil through its exit, the first week of April. Obviously, these are highly correlated positions, and risk should be treated accordingly.

We’ve discussed the record-setting imbalance between the speculative and commercial trader positions in the crude oil market both here and in our Commitment of Traders column for Modern Trader magazine. We got a washout of 13%, which I was expecting. However, it did little to shake the speculative bid. Crude oil’s rapid rebound has emboldened the speculative buyers, whom we now expect will push crude oil above the January high at $66.02 for the May contract. In fact, this model projects a top near $68.25 with nearly 70% accuracy. This fits perfectly with a macro scenario that sees the oil drillers’ forward selling capping prices under $70 per barrel

Crude oil margin is currently $2,310. I do expect this to rise as volatility increases.

We will use a dynamic sell stop to protect this long position. Therefore, the risk will change daily and may exceed your initial trade plan’s threshold. We’ll be trailing a protective stop two average true ranges behind the previous day’s close. This has yielded a maximum loss of just over $3,000 in our testing and a projected initial risk of $2,600. The six-month high and low for this calculation is $6,040 and $600. The average loss in our testing has been just under $1,700. Remember, there is a half size mini-crude oil contract as well.

US Crude Oil Futures near 1-Week High

Market Realist

US crude oil futures 

April WTI crude oil futures contracts rose 2.2% to $62.57 per barrel on March 5, 2018—the highest settlement since February 27, 2018. Brent crude oil futures contracts rose 1.8% to $65.5 per barrel on March 5, 2018.

The Energy Select Sector SPDR ETF (XLE) and the Vanguard Energy ETF (VDE) rose ~1.1% and ~1.3%, respectively, on March 5, 2018. These funds have exposure to upstream energy companies.

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Crude oil and ETFs’ performance 

Crude oil prices rose on March 5, 2018, due to the expectation of a fall in Cushing crude oil inventories, supply outages in Libya, strong demand, and ongoing supply cuts.

However, US crude oil prices declined ~2% on February 26–March 5, 2018. Prices declined due to the larger-than-expected rise in US oil inventories, an unexpected rise in gasoline inventories, and record US oil production.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the VanEck Vectors Oil Services ETF (OIH) decreased 0.1% and 2.1%, respectively, on February 26–March 5, 2018. XLE and VDE declined 2.2% and 2%, respectively, during the same period. XOP outperformed the other energy ETFs. These ETFs have exposure to oil and gas companies.

Crude oil inventory report  

On March 7, 2018, the EIA will release its crude oil inventory report. Bloomberg estimates that US oil inventories could have increased by 2.5 million barrels on February 23–March 2, 2018. A larger-than-expected increase in US crude oil inventories could pressure oil prices. 

Crude Oil Price forecast for the week of March 5, 2018

Investing.com

Technical Analysis

The crude oil markets have been negative during the week, as we have broken below an uptrend line recently, and have retested it during this week, only to fail again. This is a negative sign.

Crude Oil weekly chart, March 05, 2018

WTI Crude Oil

The WTI Crude Oil market fell significantly during the week, as we have tested the previous uptrend line, but found it to be resistive as one would expect. Technically speaking, this is a very negative sign and I anticipate that oil will roll over from here. That’s not to say that it will be easy to trade this market, but I do think that there is quite a bit of negativity. I believe that if we continue to go down to the lower part of the candle, I think we will then reach towards the $50 handle. Ultimately, I have no interest in buying this market, and if the US dollar continues to strengthen, that could also put pressure on this market.

Brent

Brent markets also fell, as the uptrend line has been tested for resistance, the sellers came in and jumped all over the market. I think that the market will probably go down to the $60 level next, perhaps the $55 level after that. The market continues to be very noisy, but I think that the rising US dollar is the least of the issues. The market will continue to see concerns about the tariffs being placed in the United States, as it could spread into the petroleum markets. If that’s the case, things could get ugly really quick, driving down global demand. However, I think that at this point the biggest problem is going to be the oversupply of crude oil, which of course is the most fundamental driver.

WTI Video 05.03.18

Brent weekly chart, March 05, 2018