Crude Oil, the Economy, and Volatility

Until the world can gain control of the coronavirus, the economic uncertainly will remain.

Energy 4

With the selloff in May Crude Oil WTI futures yesterday, in which price traded as low as -$40.00, traders are asking what that really means as far as the world economy is concerned.  As discussed yesterday, the move only reflected a small segment of the oil market.  The May contract, which is currently trading near $0, expires today.  This means that a majority of traders had already rolled their positions into the June contract.  Yesterday’s capitulation on May Crude Oil WTI futures contract seemed to have little effect on other assets and asset classes, as the focus is now on the June contract.

Now let’s take a step back and think about the bigger picutre:  In simplistic terms, NO ONE WANTED TO BUY CRUDE OIL AND RECEIVE $40 TO HOLD IT!  Why?  There is so much supply on the market already, there is literally nowhere to store it.  However, yesterday, traders believed that in 1 month, there would be enough demand/less supply for the June contract to be worth $20.43.  Today, traders are beginning to have doubts as the June contract is currently trading -25% under $15, with a low of $11.79.

Source: Tradingview, NYMEX, FOREX.com

Until the world can gain control of the coronavirus,  the economic uncertainly will remain.  And, as long as there is economic uncertainty,  crude prices are going to continue to be volatile.  There are sure to be fits and starts along the way, as some countries will begin to “re-open” and then have to slow down.

If one is looking to trade the crude volatility, but doesn’t want risk of futures or ETFs, one of the best instruments to trade as a surrogate is USD/CAD.   Canada is an oil export led economy.  Therefore, the price of crude oil plays a large part in the price of the Canadian Dollar.  Notice on a weekly timeframe that since the beginning of the year, WTI Crude Oil and USD/CAD have become increasingly negatively correlated.  The current correlation coefficient between the two assets is -0.96.  A reading of -1.00 indicates that the two move perfectly together in opposite directions.   The current reading of -0.96 is pretty close!

Source:  Tradingview, FOREX.com

USD/CAD put in a low at the beginning of the year just below 1.3000.  Since then, price has traded to 1.4667 on March 19th and has been consolidating in a pennant like formation since.  The pair had a false breakdown out of the bottom of the pennant on April 13th and shot back into the formation on April 15th.  With the move lower in Crude Oil yesterday, the pair broke higher out of the triangle and is continuing to move higher today. 

Source:  Tradingview, FOREX.com

Resistance is currently near the highs of the day, which is horizontal resistance and the 50% retracement from the March 19th highs to the April 13th lows near 1.4265.  The next level is horizontal resistance and the 61.8% Fibonacci retracement from the same time period.  Above that, price can run up and test the March 19th highs near 1.4675.  Support crosses at the downward sloping trendline for the pennant near 1.4100.  Below that is horizontal support, trendline support, and psychological support at 1.4000.  If price manages to break through there,  horizontal support is at 1.3925.

Source:  Tradingview, FOREX.com

Crude oil futures are expensive and extremely volatile to trade.  However, if one wishes to take advantage of these without actually trading crude, USD/CAD will provide many of the same directional benefits at a relatively cheaper price and with relatively less volatility.   


More from Oil

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.