Oil Price: Breakout Or Fakeout?
Callum Thomas | Nov 14, 2017 00:45
The geopolitical backdrop in the Middle East is fluid to say the least, and this fluidity has helped the black fluid undertake what is looking like a potential upside breakout as the news/noise levels remain high. But do you believe the hype?
In this article we check out a chart that raises potentially more questions than it answers on the oil markets. The chart in question comes from the latest edition of the Weekly Macro Themes report .
The chart shows the oil price against S&P 500 Energy sector relative performance. At first glance it looks like energy stock investors believe in a different story than oil traders.
There's probably two main possible interpretations of this chart:
- A. Oil traders are right and the energy sector is overdue for some outperformance after a period of relative underperformance; or
- B. Energy stock traders are right and the oil price breakout is a fakeout.
The answer will of course only be known in hindsight with the passage of time. But we as investors unfortunately can't make use of hindsight or hope in investment strategy, so let's review the weight of risks.
Looking across the rest of my indicators on crude oil prices I can see short-term negative seasonality headwinds, crowded long speculative futures positioning, bearish patterns in oil market implied volatility, US oil production at a record high, and of course the conflicting signals in the S&P 500 energy sector.
That along with the point that geopolitical risk is a 2-sided coin with upside and downside risks, means to me the weight of risks based on what I can observe right now is to the downside. I have no edge in predicting or prophesying whether a large scale conflict may occur, but I do have a good set of charts and indicators across multiple variables and they tell me not to believe the hype.
Get The App
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.