Mar 072020

I was wrong. That technical rally on oil didn’t materialize as I forecasted. Putin is as hard as a rock on his position against deeper supply cuts. This is why oil fizzled out as early as 54.00.

However, the turn of events yesterday has given us more conviction on our short trades on oil. With OPEC+ not reaching any agreements on deeper and extended supply cuts, they will resume additional production after March 31 – when their previous agreement expires. Each country will now be free to decide how much oil they will produce. This is like oil on unlimited QE (quantitative easing).

Where does leads us to now?

What we know for now (BEARISH CASE):
– no OPEC+ agreement
– COVID-19 impact
– global economic slowdown
– US continues to produce with no limits – Trump likes cheap oil

What could possibly happen – speculation (BEARISH CASE):
– OPEC members (predominantly, Saudi Arabia) will pump more oil to push BRENT below 42 where Putin said is Russia’s operational cost. Since there will be no agreements, they pump until Russia feels the pain as well.
– Libya resolves their conflict. Far fetched to a lot of analysts but what if Libya gets infected with COVID-19 and weakens the standoff that eventually causes one of the warring party to capitulate? Maybe far fetched as well.
– More flights get banned

What we know for now (BULLISH CASE):
– US Sanctions on Venezuela
– Libyan conflict that reduced supply

What could possibly happen – speculation (BULLISH CASE):
– Oil producing countries (including US) voluntarily cuts supply because of bad business
– Oil fields get hit with COVID-19 and decides to stop producing oil
– OPEC+ kiss and make up and agrees on a cut on June 5th of earlier
– COVID-19 dies away due to seasonal change or when a possible vaccine/cure is found
– Flights resume
– Everything goes back to normalcy – factories open, consumer appetite revives
– Increased Middle East tensions

What we know is already priced in. It’s better to focus on the possible events forthcoming. Which event will happen next is everyone’s guess. Which event is of highest probability is the best basis for your current trade bias.

Personally, I am seeing BRENT to hit 40 easily next week. 30’s is a possibility.

Mar 032020

Given that the market has been oversold last week, this week would most likely be a relief rally. Sell off has ceased to move further. We’re seeing a bounce made by opportunists but investors might just be waiting for the market to reach some level before they continue selling.

COVID-19 issue will remain at focus. Global growth is affected. No one in their right frame of mind would be willing to put their money to sleep in the market.

With fear at the sidelines, equities bounced of key support levels. JPY fell.

Oil made a comeback on a new rumour circulating that OPEC might just push for 1.2M bpd (barrels per day) instead of 1M. Plus the announcement of Russia willing to cooperate (reluctantly) with OPEC. This might cause a rally back to 60.00 by March 5-6.

An experienced trader at this point would try to make some money out of this relief rally. But for position traders, they are better off waiting for a sell/short opportunity. Investors should wait for a few more months before their opportunity unfolds.