Sunday, February 26, 2017

WTIC West Texas Intermediate Crude Oil, OVX Volatility and Commitments of Traders (COT) Charts

The drama in the oil patch continues. On the WTIC chart, the red rising wedge and negative divergence forecasts lower prices ahead. Oil is trading very emotionally. If OPEC comes out and says they are in near 100% compliance with the oil production agreement limiting supply, oil will jump higher. If OPEC remains quiet and the Arabs are exposed as cheaters as is typically the case, oil prices will collapse as per the charts above.

The red circles show significant tops in oil prices while the green circles show attractive bottoms in oil prices. What do you think will happen? On the OVX, note how volatility moves inverse to oil price, so the low OVX numbers, marking complacency in the oil arena, indicate a top in price. The OVX is at multi-month lows. Everybody and his bro says oil is guaranteed to go higher since the Arabs are playing nice and they are very honest about their production numbers. This creates the relaxed complacent mood and sends the OVX lower.

The API Oil Inventories released on Tuesday evenings about 5 PM EST and the EIA Oil Inventories on Wednesday morning at 10:30 AM EST are uber important. Over the last three weeks, big builds have been occurring hinting that the Middle East producers are cheating and oil production remains robust despite the claims that all nations are following the OPEC agreement to limit supply.

The API last week was a surprise drawdown in crude which created buoyancy in oil but the EIA data did not corroborate the API data. The EIA was a build. The big inventory builds in recent weeks are blamed on the bad storms especially around the oil hub in Louisiana. Last week's data was mixed. Thus, this week's inventory data takes on epic importance. If two big builds occur, the Arabs are up to their old tricks and lying about production numbers and oil will plummet as the above charts hint. If, however, there are two drawdowns in oil stocks this week and the news remains good from OPEC that everyone is playing nice and cutting production, oil price will float higher on the news flow.

The COT chart shows the bars way extended to the outer limits indicating a top in oil prices. Even the cab driver took his entire life savings and invested on the long side in oil because he said the Arabs are honest and will honor their lower production agreements.

If long oil, it is prudent to exit stage right. Even if price bounces it is not worth sticking around for what could be a dramatic failure in oil prices. If anything, nibbling on the short side is more attractive, perhaps a quickie trade in SCO may prove fruitful going forward but maintain tight stops since a news bite can hit at anytime. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

Note: The COT chart is provided courtesy of COT Price Charts and annotated by Keystone.

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