Economic Data And Forex: Strategies For Texas Traders – Crude oil trading offers excellent opportunities to profit in almost all market conditions due to its unique position in the world’s economic and political systems. Also, volatility in the energy sector has increased sharply in recent years, ensuring strong trends that can generate consistent returns for short-term swing trades and long-term time strategies.
Market participants often fail to take full advantage of crude oil fluctuations, either because they do not understand the unique characteristics of these markets or because they are unaware of hidden losses that can eat into earnings. Additionally, not all energy-intensive financial instruments are created equal, with a subset of these securities more likely to have positive results.
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Crude oil moves through supply and demand perceptions, which are affected by worldwide production as well as global economic prosperity. High supply and falling demand encourage traders to sell the crude oil market, while increasing demand and falling or flat production encourage traders to bid higher for crude oil.
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A tight convergence in positive factors can create a powerful uptrend, such as crude oil’s rise to $145.31 per barrel in July 2008, while a tight convergence in negative factors can create an equally powerful downtrend, such as the fall in August 2015 to $37.75 per barrel. When crude oil reacts to mixed conditions, price action tends to form narrow trading ranges, with sideways action often persisting for years at a time.
Professional traders and hedgers dominate the energy futures market, with industry players taking positions to offset physical exposure while hedge funds make long- and short-term predictions. Retail traders and investors are less influenced by sentimental markets such as precious metals or high beta growth stocks.
When crude oil trends sharply, retail influence increases, attracting small players to these markets through front-page headlines and table-pounding talking heads. Subsequent waves of greed and fear can accelerate underlying trends, contributing to historical peaks and collapses that print exceptionally high volume.
Crude oil is traded through two primary markets, West Texas Intermediate crude and Brent crude. WTI originates in the US Permian Basin and other local sources while Brent comes from more than a dozen fields in the North Atlantic. These varieties have different sulfur contents and API gravities, commonly referred to as light sweet crude oils. Brent has become a better indicator of prices around the world in recent years, although in 2017 WTI was trading heavily in global futures markets (after two years). Brent volume leadership).
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Pricing in these ranges remained in a narrow band for years, but ended in 2010 when the two markets diverged sharply due to a rapidly changing supply versus demand environment. Brent drilling declined sharply at the same time as WTI production rose, driven by rising US oil production, shale and fracking technologies.
1970’s Arab Oil Embargo in the U.S. The law troubled the sector, prohibiting local oil companies from selling their inventory in foreign markets. This ban was lifted in 2015.
Many of CME Group’s New York Mercantile Exchange (NYMEX) futures contracts track the WTI benchmark, with the “CL” ticker attracting significant daily volume. Most futures traders can only focus on this contract and its many derivatives. Exchange-traded funds (ETFs) and exchange-traded notes (ETNs) offer equity access to crude oil, but their mathematical construction creates significant limitations due to contango and backwardation.
WTI crude rose after World War II, peaking above $20 and entering a narrow band until the ban in 1970 followed by a parabolic rally to $120. It peaked in the latter half of the decade and began a troubling decline before the new millennium, dropping into the teens. Crude oil entered a new and powerful uptrend in 1999, reaching an all-time high of $157.73 in June 2008. It then fell from that level to a large trading range between the upper $20s, settling at around $55 at the end of 2017. As of January 2021, it was trading at around $47.
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The NYMEX WTI Light Sweet Crude Oil Futures Contract (CL) trades over 10 million contracts per month, offering excellent liquidity. However, it has relatively high risk due to the 1,000 barrel contract unit and .01 per barrel minimum price fluctuation. Dozens of other energy-based products are offered by the NYMEX, with the majority attracting professional speculators but few private traders or investors.
U.S. The Oil Fund offers the most popular way to play crude oil through equities, posting an average daily volume of over 20-million shares. This security tracks WTI futures but is vulnerable to contango due to mismatches between the first-month and longer-dated contracts that reduce the size of price spreads.
Oil companies and sector funds offer diverse industry exposure, with production, exploration and oil service operations presenting different trends and opportunities. While most companies track the general trend of crude oil, they can turn sharply over long periods of time. These counter-swings often occur when equity markets are trending sharply, triggering rallies or selloffs cross-market correlations that encourage lockstep behavior between different sectors.
Reserve currencies provide an excellent way to gain long-term crude oil exposure, with the economies of many nations closely leveraging their energy resources. The Colombian and Mexican peso, along with the US dollar cross, under the tickers USD/COP and USD/MXN, have tracked crude oil for years, providing speculators with highly liquid and easily scaled access to uptrends and downtrends. Bearish crude oil positions require buying this cross while bullish positions require selling it short.
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Trading the crude oil and energy markets requires exceptional skills to make consistent profits. Market players looking to trade crude oil futures and its numerous derivatives need to learn what makes the commodity move, prevailing rush patterns, long-term price history and the physical differences between the various ranges.
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Offers appearing in this table are from partnerships that receive compensation. This compensation can affect how and where listings appear. Not all offers available in the market are included. West Texas Intermediate traded at $105 a barrel in early July, but ended last week at $58. The most important factor is growth in US manufacturing. But another reason why oil prices have fallen so much is the weakness in demand for the product, which may be related to the overall slowdown in global economic growth. Here I comment on the importance of that second factor.
For example, the price of copper fell from $3.27/pound to $2.93, a 10% drop in the same six months. This, of course, has nothing to do with people’s success in getting more oil out of rocks in Texas. Softness in demand for commodities such as copper and oil could be an indicator of renewed weakness in the global economy.
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The yield on 10-year US Treasury bonds has also fallen by nearly 50 basis points over this period, for which I believe the most plausible explanation is again weakness in the global economy.
To get a sense of the quantitative significance of these developments, I regressed the weekly change in the natural logarithm of crude oil prices (here’s why I use the logarithm for this) on the 10-year yield change and log change. Copper price and dollar value using data from April 2007 to June 2014. Here are the results of that regression, with the t-statistic in parentheses as calculated using the Newey-West adjustment with 5 lags:
I used the coefficients from that historical relationship to see how much oil prices have fallen since this summer, taking into account the decline in copper prices and the 10-year yield and the rise in oil prices, to see how much oil prices have fallen since this summer. Dollar to forecast values ​​are plotted as dashed lines in the figure below, along with actual oil prices, in solid black. Although we know nothing about the production side of the oil market, based on these other three possible indicators of global economic activity we would have expected oil prices to fall from $105/barrel to $85 dollars in June.
Actual price of West Texas Intermediate (in black) and predicted value based on the above regression (dashed blue).
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In other words, of the 45% decline in oil prices, 19 percentage points—more than 2/5—would represent new signs of weakness in the global economy. The overall forex market trend is generally higher than the overall stock market. . why The equity market, which is really a market of many individual stocks, is governed by the micro-dynamics of particular companies. On the other hand, the foreign exchange market is driven by macroeconomic trends that can sometimes take years to play out.
These trends manifest themselves best in major pairs and commodity block currencies. Here we take a look at these trends, examining where and why they occur. Then we will also see what kind of pairs we offer
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