How to trade crude oil from here
Crude oil made a strong recovery on Friday after it flash crashed on Wednesday. Naturally, people started calling it a major bottom and triple-digit oil prices are becoming a popular discussion topic again.
But was the flash crash truly a major washout? We beg to disagree.
First of all, it occurred after Wednesday's close when liquidity was thin. It did not take much to move the price at that time. The move would have been much more significant if it had occurred during regular hours, especially at the close.
Second, crude oil has indeed become oversold. But positioning is far from a major washout. Here is our preferred indicator from the SpreadCharts app for timing major washouts in crude oil (highlighted in blue).
We're clearly far from such an extreme. But remember, there is no guarantee the positioning must reach the same level again. Pullbacks in COT data are more shallow in bull markets.
Although a bounce is very likely from last week's oversold level, a few pieces are still missing for a sustainable rally. For example, the oil products remain weak.
The breakdown of the 3-2-1 crack spread, reflecting the refinery margins, is what started the latest selloff. Interestingly, it happened exactly when oil bros became super excited after the OPEC+ cut and WTI surpassed $80. But despite Friday's bounce in crude oil, we have yet to see a similar liftoff in the spread.
The weakness is concentrated in RBOB gasoline, where the interdelivery spreads are still heading down across the curve.
So, how should one trade crude oil in this environment?
As we explained in our last macro outlook for premium users of SpreadCharts, the current macro regime is not favorable to crude oil. That still holds true.
On the other hand, the downside is limited too, at least until the economy starts really deteriorating. The support is mostly provided by OPEC+'s readiness to intervene in the market if necessary.
Therefore, the right strategy seems to be playing the range for now. Here is another chart from the app that we revealed to premium users months ago. It shows the percentage backwardation on the mid part of the Brent curve.
As long as we stay in the area between 1% and 2% backwardation, the current regime will continue. And be aware of fake breaks, like we saw right after the OPEC+ intervention at the beginning of April.
This chart should help you navigate the crude oil market in these difficult times. It filters out the noise and helps you spot a possible regime change in case of a sustainable break from the 1% - 2% range.
And the best thing is, everyone can follow this chart in the SpreadCharts app.
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Disclaimer
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