Crude breakout

March 20, 2018 08:00 AM
Opening Bell

Industry insights from a 28-year trading industry veteran.

No market we cover has been as compelling as crude oil has been during the last decade. While we have been in the midst of a historic bull equity market, and an even longer-term bull market in bonds — which may or may not have topped — the energy sector has produced consistent trends and volatility. 

Crude oil has provided opportunities for technical and fundamental traders. It has had dozens of significant moves (greater than 10%) in both directions over a relatively short period. It has been great to cover because it has been so dynaamic. During the last decade, we have written about the concept of peak oil; whether investment products accessing commodities (with a high concentration in energy) was effectively hoarding crude oil and affecting the inflation it was created to hedge; the revolution in fracking technology and how the United States is becoming the world leader in energy production; how climate change trends will affect energy; and OPEC’s roll in managing and manipulating the price of crude oil. 

That is only a partial list, but each is a major issue that can and have had an impact on the markets. It is no wonder predicting market direction is so difficult; at any one time, the market shifts to follow one trend and traders focused on the wrong fundamental find themselves on the wrong side of a trade. 

This issue we look at the crude oil market and provide the best analysis from our group of experts. In “A Crude New Day”  we describe how the crude oil market may be entering a new phase. There had been a focus on supply and the overhang created by OPEC’s 2014 decision to not cut production in the face of plummeting oil prices, but it is clear that things have changed. A lot of the excess supply has been exhausted and global economic growth is creating expanded global demand. 

Despite the emergence of greater U.S. crude oil production, OPEC still arguably has the most control over the price of crude. Well, OPEC is primarily controlled by Saudi Arabia, and its plan for an initial public offering of Saudi Aramco could have an effect on the cartel and market. In “Saudi Aramco IPO Would Be Huge,” Ellen Wald provides a history of the company, which is a hybrid between an independent international energy firm and national oil company. 

Throughout this issue we highlight various energy firms and provide guidance on their value. Our experts expect growth in both crude oil production and demand, so the firms providing services to the producers are likely to outperform those that are more dependent on price. 

Emil van Essen, a former Top Trader of the Year and contributor, has recently launched a fund to exploit this outlook (see this month's Trader Profile,  “Van Essen: An old trader’s new trick.” Van Essen has a habit of building innovative strategies that produce non-correlated returns. 

What is clear is that the drivers of trends in energy are constantly shifting. To trade this sector successfully, traders need to be looking at what comes next.   

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.