A New President's Potential Impact on Oil Prices1. Introduction
The U.S. presidential election in 2024 is set to bring new leadership, with a new president guaranteed to take office. As history has shown, political transitions often have a profound effect on financial markets, and crude oil is no exception. Traders, investors and hedgers are now asking the critical question: how will WTI Crude Oil futures react to this change in leadership?
While there is much speculation about how a Democrat versus a Republican might shape oil policy, data-driven insights provide a more concrete outlook. Using a machine learning model based on key U.S. economic indicators, we’ve identified potential movements in crude oil prices, spanning short, medium, and long-term timeframes.
2. Key Machine Learning Predictions for Crude Oil Prices
Short-Term (1 Week to 1 Month):
Based on the machine learning model, the immediate market reaction within the first week following the election is expected to be minimal, with predicted price changes below 2% for both a Republican and Democratic win. The one-month outlook also suggests additional opportunity.
Medium-Term (1 Quarter to 1 Year):
The model shows a significant divergence in crude oil prices over the medium term, with a potential sharp upward movement one year after the election. Regardless of which party claims the presidency, WTI crude oil prices could potentially rise by over 40%. This is in line with historical trends where significant price shifts occurred one year post-election, driven by economic recovery, fiscal policies, and broader market sentiment.
Long-Term (4 Years):
Over the course of the full four-year presidential term, the model predicts more moderate growth, averaging around 15%. The data suggests that, while short-term market movements may seem reactive, the long-term outlook is more balanced and less influenced by the winning party. Instead, economic conditions, such as interest rates and industrial activity, will have a more sustained impact on crude oil prices.
3. Feature Importance: The Drivers Behind Crude Oil Price Movements
The machine learning model's analysis highlights that crude oil price movements, especially one year after the election, are primarily driven by economic indicators, rather than the political party in power. Below are the top features influencing crude oil prices:
Top Economic Indicators Influencing Crude Oil:
Fed Funds Rate: The most significant driver of crude oil prices, as interest rate policies affect everything from borrowing costs to overall economic growth. Changes in the Fed Funds Rate can signal shifts in economic activity that directly impact oil demand apart from the US Dollar itself.
Labor Force Participation Rate: A critical indicator of economic health, a higher participation rate suggests a stronger labor market, which supports increased industrial activity and energy consumption, including crude oil.
Producer Price Index (PPI): The PPI reflects inflation at the producer level, impacting the cost of goods and services, including oil-related industries.
Consumer Sentiment Index: A measure of the general public's outlook on the economy, which indirectly influences energy demand as consumer confidence affects spending patterns.
Unit Labor Costs: An increase in labor costs can signal inflationary pressures, which could lead to changes in oil prices as businesses pass on higher costs to consumers.
This study exclusively uses U.S. economic data, excluding oil-related fundamentals such as OPEC+ supply and demand information, in order to focus on the election’s direct impact through domestic economic channels.
Minimal Influence of Political Party on Price Movements:
Interestingly, the machine learning model suggests that the political party of the newly elected president has a relatively low impact on crude oil prices. The performance of WTI crude oil appears to be more closely tied to macroeconomic factors, such as employment data and inflation, than the specific party in power.
These findings emphasize the importance of focusing on economic fundamentals when analyzing crude oil price movements for longer term exposures, rather than solely relying on political outcomes.
4. Historical Analysis of Crude Oil Price Reactions to U.S. Elections
Looking back over the last two decades, the performance of crude oil post-election has varied, depending on global conditions and the economic policies of the newly elected president.
Notable Historical Movements:
George W. Bush (Republican): In his 2000 election, crude oil dropped nearly 50% within a year, reflecting the broader economic fallout from the bursting of the dot-com bubble and the events of 9/11. In contrast, his 2004 re-election saw oil prices climb 21.5% within a year, driven by the Iraq War and increasing global demand for energy.
Barack Obama (Democratic): After his 2008 election, crude oil prices surged by 33.8% within one year, partly due to economic recovery efforts following the global financial crisis. His 2012 re-election saw more modest growth, with an 8.3% rise over the same period.
Donald Trump (Republican): His election in 2016 coincided with a moderate 23.8% increase in crude oil prices over one year, as the U.S. ramped up energy production through fracking, contributing to global supply increases.
Joe Biden (Democratic): Most recently, crude oil prices skyrocketed by over 100% in the year following Biden’s 2020 victory, driven by post-pandemic economic recovery and supply chain disruptions that affected global energy markets.
5. WTI Crude Oil Contracts: CL and MCL Explained
When trading crude oil futures, the two most popular contracts offered by the CME Group are WTI Crude Oil Futures (CL) and Micro WTI Crude Oil Futures (MCL). Both contracts offer traders a way to speculate or hedge on the price movements of crude oil, but they differ in size, margin requirements, and ideal use cases.
WTI Crude Oil Futures (CL):
Price Fluctuations: The contract moves in increments of $0.01 per barrel, meaning a $10 change for one contract.
Margin Requirements: As of recent estimates, the margin requirement for trading a CL contract is around $6,000, though this can fluctuate depending on market volatility.
Micro WTI Crude Oil Futures (MCL):
Price Fluctuations: 10 times less. The contract moves in increments of $0.01 per barrel, meaning a $1 change for one contract.
Margin Requirements: 10 times less, around $600 per contract.
Practical Application:
During periods of heightened market volatility—such as the lead-up to and aftermath of a U.S. presidential election—traders can use both CL and MCL contracts to navigate expected price fluctuations. Larger traders might use CL to hedge against or capitalize on significant price movements, while retail traders may prefer MCL for smaller, controlled exposure.
6. Conclusion
As the 2024 U.S. presidential election approaches, crude oil traders are watching closely for market signals. While political outcomes can cause short-term volatility, the machine learning model’s predictions emphasize that broader economic factors will drive crude oil prices more significantly over the medium and long term.
Whether a Democrat or Republican wins, crude oil prices are expected to see a potential increase, particularly one year after the election. This surge, driven by factors such as interest rates, labor market health, and inflation, suggests that traders should focus on these economic indicators rather than placing too much weight on which party claims the presidency.
7. Risk Management Reminder
Navigating market volatility, especially during a presidential election period, requires careful risk management. Crude oil traders, whether trading standard WTI Crude Oil futures (CL) or Micro WTI Crude Oil futures (MCL), should be mindful of the following strategies to mitigate potential risks:
Use of Stop-Loss Orders:
Setting predefined exit points, traders can avoid significant drawdowns if the market moves against their position.
Leverage and Margin Control:
Overexposure can lead to margin calls and forced liquidation of positions in volatile markets.
Position Sizing:
Adjusting position sizes according to risk tolerance is vital especially during uncertain periods like elections.
Hedging Strategies:
Traders might consider hedging their crude oil positions with other instruments, such as options or spreads, to protect against unexpected market moves.
Monitoring Economic Indicators:
Keeping a close watch on key U.S. economic data can provide valuable clues to future crude oil futures price movements.
By using these risk management tools effectively, traders can better navigate the expected volatility surrounding the 2024 U.S. election and protect themselves from significant market swings.
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com - This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
Wticrudeoil
Exploring Bearish Plays w/ Futures, Micros & Options on FutureIntroduction
The WTI Crude Oil futures market provides various avenues for traders to profit from bullish and bearish market conditions. This article delves into several bearish strategies using standard WTI Crude Oil futures, Micro WTI Crude Oil futures contracts, and options on these futures. Whether you are looking to trade outright futures contracts, construct complex spreads, or utilize options strategies, this publication aims to assist you in formulating effective bearish plays while managing risk efficiently.
Choosing the Right Contract Size
When considering a bearish play on WTI Crude Oil futures, the first decision involves selecting the appropriate contract size. The standard WTI Crude Oil futures and Micro WTI Crude Oil futures contracts offer different levels of exposure and risk.
WTI Crude Oil Futures:
Standardized contracts linked to WTI Crude Oil with a point value = $1,000 per point.
Suitable for traders seeking significant exposure to market movements.
Greater potential for profits but also higher risk due to larger contract size.
TradingView ticker symbol is CL1!
Margin Requirements: As of the current date, the margin requirement for WTI Crude Oil futures is approximately $6,000 per contract. Margin requirements are subject to change and may vary based on the broker and market conditions.
Micro WTI Crude Oil Futures:
Contracts representing one-tenth the value of the standard WTI Crude Oil futures.
Each point move in the Micro WTI Crude Oil futures equals $100.
Ideal for traders who prefer lower exposure and risk.
Allows for more precise risk management and position sizing.
TradingView ticker symbol is MCL1!
Margin Requirements: As of the current date, the margin requirement for Micro WTI Crude Oil futures is approximately $600 per contract. Margin requirements are subject to change and may vary based on the broker and market conditions.
Choosing between standard WTI Crude Oil and Micro WTI Crude Oil futures depends on your risk tolerance, account size, and trading strategy. Smaller contracts like the Micro WTI Crude Oil futures offer flexibility, particularly for newer traders or those with smaller accounts.
Bearish Futures Strategies
Outright Futures Contracts:
Selling WTI Crude Oil futures outright is a straightforward way to express a bearish view on the market. This strategy involves selling a futures contract in anticipation of a decline in oil prices.
Benefits:
Direct exposure to market movements.
Simple execution and understanding.
Ability to leverage positions due to margin requirements.
Risks:
Potential for significant losses if the market moves against your position.
Mark-to-market losses can trigger margin calls.
Example Trade:
Sell one WTI Crude Oil futures contract at 81.00.
Target price: 76.00.
Stop-loss price: 82.50.
This trade aims to profit from a 5.00-point decline in oil prices, with a risk of a 1.50-point rise.
Futures Spreads:
1. Calendar Spreads: A calendar spread, also known as a time spread, involves selling (or buying) a longer-term futures contract and buying (or selling) a shorter-term futures contract with the same underlying asset. This strategy profits from the difference in price movements between the two contracts.
Benefits:
Reduced risk compared to outright futures positions.
Potential to profit from changes in the futures curve.
Risks:
Limited profit potential compared to outright positions.
Changes in contango or backwardation could hurt the position.
Example Trade:
Sell an October WTI Crude Oil futures contract.
Buy a September WTI Crude Oil futures contract.
Target spread: Decrease in the difference between the two contract prices.
In this example, the trader expects the October contract to lose more value relative to the September contract over time. The profit is made if the spread between the December and September contracts widens.
2. Butterfly Spreads: A butterfly spread involves a combination of long and short futures positions at different expiration dates. This strategy profits from minimal price movement around a central expiration date. It is constructed by selling (or buying) a futures contract, buying (or selling) two futures contracts at a nearer expiration date, and selling (or buying) another futures contract at an even nearer expiration date.
Benefits:
Reduced risk compared to outright futures positions.
Profits from stable prices around the middle expiration date.
Risks:
Limited profit potential compared to other spread strategies or outright positions.
Changes in contango or backwardation could hurt the position.
Example Trade:
Sell one November WTI Crude Oil futures contract.
Buy two October WTI Crude Oil futures contracts.
Sell one September WTI Crude Oil futures contract.
In this example, the trader expects WTI Crude Oil prices to remain relatively stable.
Bearish Options Strategies
1. Long Puts: Buying put options on WTI Crude Oil futures is a classic bearish strategy. It allows traders to benefit from downward price movements while limiting potential losses to the premium paid for the options.
Benefits:
Limited risk to the premium paid.
Potential for significant profit if the underlying futures contract price falls.
Leverage, allowing control of a large position with a relatively small investment.
Risks:
Potential loss of the entire premium if the market does not move as expected.
Time decay, where the value of the option decreases as the expiration date approaches.
Example Trade:
Buy one put option on WTI Crude Oil futures with a strike price of 81.00, expiring in 30 days.
Target price: 76.00.
Stop-loss: Premium paid (e.g., 2.75 points x $1,000 per contract).
If the WTI Crude Oil futures price drops below 81.00, the put option gains value, and the trader can sell it for a profit. If the price stays above 78.25, the trader loses only the premium paid.
2. Synthetic Short: Creating a synthetic short involves buying a put option and selling a call option at the same strike price and expiration. This strategy mimics holding a short position in the underlying futures contract.
Benefits:
Similar profit potential to shorting the futures contract.
Flexibility in managing risk and adjusting positions.
Risks:
Potential for unlimited losses if the market moves significantly against the position.
Requires margin to sell the call option.
Example Trade:
Buy one put option on WTI Crude Oil futures at 81.00, expiring in 30 days.
Sell one call option on WTI Crude Oil futures at 81.00, expiring in 30 days.
Target price: 76.00.
The profit and loss (PnL) profile of the synthetic short position would be the same as holding a short position in the underlying futures contract. If the price falls, the position gains value dollar-for-dollar with the underlying futures contract. If the price rises, the position loses value in the same manner.
3. Bearish Options Spreads: Options offer versatility and adaptability, allowing traders to design various bearish spread strategies. These strategies can be customized to specific market conditions, risk tolerances, and trading goals. Popular bearish options spreads include:
Vertical Put Spreads
Bear Put Spreads
Put Debit Spreads
Ratio Put Spreads
Diagonal Put Spreads
Calendar Put Spreads
Bearish Butterfly Spreads
Bearish Condor Spreads
Etc.
Example Trade:
Bear Put Spread: Buying the 81.00 put and selling the 75.00 put with 30 days to expiration.
Risk Profile Graph:
This example shows a bear put spread aiming to profit from a decline in WTI Crude Oil prices while limiting potential losses.
For detailed explanations and examples of these and other bearish options spread strategies, please refer to our published ideas under the "Options Blueprint Series." These resources provide in-depth analysis and step-by-step guidance.
Trading Plan
A well-defined trading plan is crucial for successfully executing any strategy. Here’s a step-by-step guide to formulating your plan:
1. Select the Strategy: Choose between outright futures contracts, calendar or butterfly spreads, or options strategies based on your market outlook and risk tolerance.
2. Determine Entry and Exit Points:
Entry price: Define the price level at which you will enter the trade (e.g., breakout, UFO resistance, indicators convergence/divergence, etc.).
Target price: Set a realistic target based on technical analysis or market projections.
Stop-loss price: Establish a stop-loss level to manage risk and limit potential losses.
3. Position Sizing: Calculate the appropriate position size based on your account size and risk tolerance. Ensure that the position aligns with your overall portfolio strategy.
4. Risk Management: Implement risk management techniques such as using stop-loss orders, hedging, and diversifying positions to protect your capital. Risk management is vital in trading to protect your capital and ensure long-term success.
Conclusion
In this article, we've explored various bearish strategies using WTI Crude Oil futures, Micro WTI Crude Oil futures, and options on futures. From outright futures contracts to sophisticated spreads and options strategies, traders have multiple tools to capitalize on bearish market conditions while managing their risk effectively.
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
Options Blueprint Series: Pre and Post OPEC+ WTI Options PlaysIntroduction
The world of crude oil trading is significantly influenced by the decisions made by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+. These meetings, which often dictate production levels, can lead to substantial market volatility. Traders and investors closely monitor these events, not only for their immediate impact on oil prices but also for the broader economic implications.
In this article, we explore two sophisticated options strategies designed to capitalize on the volatility surrounding OPEC+ meetings, specifically focusing on WTI Crude Oil Futures Options. We will delve into the double calendar spread, a strategy to exploit the expected rise in implied volatility (IV) before the meeting, and the transition to a long iron condor, which aims to profit from potential post-meeting volatility adjustments.
Understanding the Market Dynamics
OPEC+ meetings are pivotal events in the global oil market, with decisions that can significantly influence crude oil prices. These meetings typically revolve around discussions on production quotas, which directly affect the supply side of the oil market. The anticipation and outcomes of these meetings create a fertile ground for volatility, especially in the days leading up to and immediately following the announcements.
Implied Volatility (IV) Dynamics
Pre-Meeting Volatility: In the days leading up to an OPEC+ meeting, implied volatility (IV) often rises. This increase is driven by market uncertainty and the potential for significant price moves based on the meeting's outcome. Traders buy options to hedge against or speculate on the potential price movements, thereby increasing the demand for options and pushing up IV.
Post-Meeting Volatility: After the meeting, IV can either spike or drop sharply, depending on whether the outcome aligns with market expectations. An unexpected decision can cause a significant IV spike due to the new uncertainty introduced, while a decision in line with expectations can lead to a sharp drop as the uncertainty dissipates.
Strategy 1: Double Calendar Spread
The double calendar spread is a sophisticated options strategy that can potentially take advantage of rising implied volatility (IV) leading up to significant market events, such as the OPEC+ meeting. This strategy involves establishing positions in options with different expiration dates but the same strike price, allowing traders to profit from the increase in IV while managing risk effectively.
Structure
Long Legs: Buy longer-term call and put options.
Short Legs: Sell shorter-term call and put options.
The strategy typically involves setting up two calendar spreads at different strike prices (one higher and one lower), thus the term "double calendar."
Rationale
The rationale behind this strategy is that the longer-term options will experience a greater increase in IV as the event approaches, inflating their premiums more than the shorter-term options. As the short-term options expire, traders can realize a profit from the difference in premiums, assuming IV rises as expected.
Strategy 2: Transition to Long Iron Condor
As the OPEC+ meeting date approaches and the double calendar spread positions reach their peak profitability due to the elevated implied volatility (IV), it becomes strategic to transition into a long iron condor. This shift aims to capitalize on potential volatility changes and capture profits from the expected IV drop.
Structure
Closing the Double Calendar: Close the short-term call and put options from the double calendar spread.
Setting Up the Long Iron Condor: Sell new OTM call and put options with the same expiration date as the long legs of the double calendar spread.
The result is a position where the trader holds long options closer to the money and short options further out, creating a long condor structure.
Rationale
The rationale for transitioning to a long iron condor is to capture profits from a potential decrease in IV after the OPEC+ meeting.
Practical Example
To illustrate the application of the double calendar spread and the transition to a long iron condor, let's walk through a detailed example using hypothetical WTI Crude Oil Futures prices.
Double Calendar Spread Setup
1. Initial Conditions:
Current price of WTI Crude Oil Futures: $77.72 per barrel.
Date: One week before the OPEC+ meeting.
2. Long Legs:
Buy a call option with a strike price of $81, expiring on Jun-7 2024 @ 0.32.
Buy a put option with a strike price of $74, expiring on Jun-7 2024 @ 0.38.
3. Short Legs:
Sell a call option with a strike price of $81, expiring on May-31 2024 @ 0.05.
Sell a put option with a strike price of $74, expiring on May-31 2024 @ 0.09.
Note: We are using the CME Group Options Calculator in order to generate fair value prices and Greeks for any options on futures contracts.
Transition to Long Iron Condor
1. Closing the Double Calendar:
Close the short-term call and put options just before they expire @ 0.01 (assuming they are OTM on Friday May-31, before the market closes for the weekend).
2. Setting Up the Iron Condor:
Sell a call option with a strike price of $82, expiring on Jun-7 2024 @ 0.13.
Sell a put option with a strike price of $73, expiring on Jun-7 2024 @ 0.18.
0.11 and 0.17 are estimated values assuming WTI Crude Oil Futures remains fairly centered around 77.50 and that IV has risen into the OPEC+ meeting weekend.
Transitioning from the Double Calendar to the Long Iron Condor would be done on Friday May-31.
3. Resulting Position:
You now hold a long call at $81, a long put at $74, a short call at $82, and a short put at $73, forming a long iron condor.
The risk of the trade has been reduced by half (assuming the real fills coincide with the estimated values above) from 0.56 to 0.27 = $270 with a potential for reward of up to 0.73 (1 – 0.27) = $730.
This practical example demonstrates how to effectively implement and transition between the double calendar spread and the long iron condor to navigate the volatility surrounding an OPEC+ meeting.
Importance of Risk Management
Effective risk management is crucial when implementing options strategies, particularly around significant market events like the OPEC+ meeting. The volatility and potential for sharp market moves require traders to have robust risk management practices to protect their capital and ensure long-term success.
Avoiding Undefined Risk Exposure
Undefined risk exposure occurs when traders have no clear limit on their potential losses. This can happen with certain options strategies that involve selling naked options. To avoid this, traders should always define their risk by using strategies that have built-in risk limits, such as spreads and condors.
Precise Entries and Exits
Making precise entries and exits is critical in options trading. This involves:
Entering trades at optimal times to maximize potential profits.
Exiting trades at predetermined levels to lock in gains or limit losses.
Adjusting trades based on market conditions and new information.
Additional Risk Management Practices
Diversification: Spread risk across different assets and strategies.
Position Sizing: Allocate only a small percentage of capital to each trade to avoid significant losses from a single position.
Continuous Monitoring: Regularly review and adjust positions as market conditions evolve.
By adhering to these risk management principles, traders can navigate the complexities of the options market and mitigate the risks associated with volatile events like OPEC+ meetings.
Conclusion
Navigating the volatility surrounding significant market events like the OPEC+ meeting requires strategic planning and effective risk management. By implementing the double calendar spread before the meeting, traders can capitalize on the anticipated rise in implied volatility (IV). Transitioning to a long iron condor after the meeting allows traders to benefit from potential post-meeting volatility adjustments or price stabilization.
These strategies, when executed correctly, offer a structured approach to managing market uncertainties and capturing profits from both pre- and post-event volatility. The key lies in precise timing, appropriate strike selection, and diligent risk management practices to protect against adverse market movements.
By understanding and applying these sophisticated options strategies, traders can enhance their ability to navigate the complexities of the crude oil market and leverage the opportunities presented by OPEC+ meetings.
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: www.tradingview.com This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
Special Report: Celebrating 40 Years of Crude Oil FuturesNYMEX: WTI Crude Oil ( NYMEX:CL1! )
On March 30, 1983, New York Mercantile Exchange (NYMEX) launched futures contract on WTI crude oil. This marked the beginning of an era of energy futures.
WTI is now the most liquid commodity futures contract in the world. It’s 1.7 million daily volume is equivalent to 1.7 billion barrels of crude oil and $125 billion in notional value. For comparison, global oil production was 89.9 million barrels per day in 2021.
Looking back at 1983, exactly 40 years ago:
• NYMEX was primarily a marketplace for agricultural commodities, with Maine Potato Futures being its biggest contract;
• NYMEX was a small Exchange with 816 members, mainly local traders and brokers;
• Known as Black Gold, crude oil was a strategic commodity regulated by governments and monopolized by the Big Oil, the so-called “Seven Sisters”;
• Pricing of crude oil was not a function of free market but controlled by the Organization of Petroleum Export Countries (OPEC), an oil cartel.
The birth of crude oil futures contract was a remarkable story of financial innovation and great vision. Facing a “Mission Impossible”, NYMEX successfully pulled it off. At the helm of the century-old Exchange was Michel Marks, its 33-year-old Chairman, and John E. Treat, the 37-year-old NYMEX President.
The “Accidental Chairman”
Michel Marks came from a long-time NYMEX member family. His father, Francis Q. Marks, was a trading pit icon and influential member. Since high school, the younger Marks worked as a runner on the trading pit for his family business. After receiving an Economics degree from Princeton University, Michel Marks returned to NYMEX as a full-time member, trading platinum and potatoes.
In 1977, the entire NYMEX board of directors resigned, taking responsibility for the Potato Futures default from the prior year. Michel Marks was elected Vice Chairman of the new Board. He was 27 years old.
One year later, the Chairman at the time suffered a stroke. Michel Marks replaced him as the new NYMEX Chairman. At 28, he’s the youngest leader of any Exchange in the 175-year history of modern futures industry.
White House Energy Advisor
John E. Treat served in the US Navy in the Middle East and later worked as an international affairs consultant in the region. He received an Economics degree in Princeton and a master’s degree in international relations from John Hopkins.
During the Carter Administration (1977-1981), Treat worked at the US Department of Energy. He served as Deputy Assistant Secretary for International Affairs and sat on the National Security Council and the Federal Energy Administration. In his capacity, Treat was at the center of the formation of US energy policy.
After President Carter lost his reelection bid, Treat left Washington in 1981. At the time, NYMEX was exploring new contracts outside of agricultural commodities. One possible direction was the energy sector, where NYMEX previously listed a Heating Oil contract with little traction in the market. With his strong background, Treat was recruited by NYMEX as a senior vice president.
A year later, after then President Richard Leone resigned, Treat was nominated by Chairman Marks to become NYMEX President. He was 36 years old.
The Birth of WTI Crude Oil Futures
In 1979, the Islamic Revolution in Iran overthrew the Pahlavi dynasty and established the Islamic Republic of Iran, led by Shiite spiritual leader Ayatollah Khomeini.
Shortly after, the Iran-Iraq War broke out. Daily production of crude oil fell sharply, and the price of crude oil rose from $14 to $35 per barrel. This event was known as the second oil crisis. It triggered a global economic recession, with U.S. GDP falling by 3 percent.
After President Reagan took office in 1981, he introduced a series of new policies, known as Reaganomics, to boost the U.S. economy. The four pillars that represent Reaganomics were reducing the growth of government spending, reducing federal income taxes and capital gains taxes, reducing government regulation, and tightening the money supply to reduce inflation.
In terms of energy policy, the Reagan administration relaxed government regulations on domestic oil and gas exploration and relaxed the price of natural gas.
NYMEX President John Treat sensed that the time was ripe for energy futures. He formed an Advisory Committee to conduct a feasibility study on the listing of crude oil futures. His strategic initiative received the backing of Chairman Michel Marks, who in turn gathered the support of the full NYMEX membership.
Arnold Safir, an economist on the advisory board, led the contract design of WTI crude oil futures. The underlying commodity is West Texas Intermediate produced in Cushing, Oklahoma. The delivery location was chosen for the convenience of domestic oil refineries. WTI oil contains fewer impurities, which results in lower processing costs. US refineries prefer to use WTI over the heavier Gulf oil.
WTI trading code is CL, the abbreviation of Crude Light. Contract size is 1,000 barrels of crude oil. At $73/barrel, each contract is worth $73,000. Due to the profound impact of crude oil on world economy, NYMEX lists contracts covering a nine-year period.
On March 29, 1983, the CFTC approved NYMEX's application. The next day, WTI crude oil futures traded on the NYMEX floor for the first time.
Competing for the Pricing Power
Now that crude oil futures were listed. Initially, only NYMEX members and speculators were trading the contracts. All the oil industry giants sat on the sidelines.
John Treat knew that without their participation, the futures market could not have meaningful impact on the oil market, not to mention a pricing power over crude oil.
In early 1980s, the global oil market was monopolized by seven Western oil companies, known as the "Seven Sisters". Together, they control nearly one-third of global oil and gas production and more than one-third of oil and gas reserves.
1) Standard Oil of New Jersey, later became Exxon;
2) Standard Oil of New York, later became Mobil Oil Company; It merged with Exxon in 1998 to form ExxonMobil;
3) Standard Oil of California, later became Chevron; It took over Texaco in 2001, and the combined company is still named Chevron;
4) Texaco, collapsed in 2001 and was taken over by Chevron;
5) Gulf Oil, which was acquired by Chevron in 1984;
6) British Persian Oil Company, operating in Iran, withdrew after the Iranian Revolution and then fully operated the North Sea oil fields, later British Petroleum ("BP");
7) Shell, an Anglo-Dutch joint venture.
Treat's background as President Carter's energy adviser played a key role. After nearly a year of hard work, the first Big Oil entered the NYMEX crude oil trading floor. However, it was not until five years later that all Seven Sisters became NYMEX members.
OPEC producers tried to boycott the crude oil futures market. However, as trading volume grew, they eventually gave in, first by Venezuela and then the oil producers in the Middle East.
Interestingly, the Middle Eastern oil producers started out by trading COMEX gold futures, probably as a hedge against oil prices. Gold has been a significant part in the Middle Eastern culture for long. As the main buyers of gold, the Arabs buy more gold when their pockets are filled with rising oil prices, and conversely, they sell gold when oil revenues fall and their ability to buy gold decreases.
With the participation of Big Oil and OPEC, coupled with an active crude oil options market, crude oil pricing power has shifted from the Middle East to NYMEX's trading floor by the end of the 1980s. WTI has also become a globally recognized benchmark for crude oil prices.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
USOIL 3rd OCTOBER 2022 - COMBINATION STRATEGYUSOIL Combination strategy with a Trendline, Unfilled Order (UFO) and Psychological level.
Trend is a movement that shows where the market is moving. The term "trend" in everyday life is often used to express a situation, where something is in vogue or is gaining public attention.
As you know, a trendline is a tool that can be used to recognize the direction of a trend. Therefore, a trendline can serve as both Support (in an uptrend) and Resistance (in a downtrend). Trend line, Its function as a technical tool does not need to be doubted. Besides being able to help identify trends, this tool can also be used to find entry points. In looking for entry points, you can use bounce and breakout opportunities. remember "the trend is your friend". Believe it or not, in forex trading, the trendline is one of the friends that can help you to follow the direction where the market is moving.
This trend movement forms a series of sequential waves with the following levels:
Peak (High/H),
Higher peak (Higher High / HH)
Lower peak (Lower High / LH )
Valley (Low/L)
higher valley (Higher Low / HL )
Lower valley (Lower Low / LL)
By knowing the support and resistance levels, a trader can minimize risks and maximize profits. During a downtrend, a trendline can serve as resistance. But conversely, during an uptrend, the trendline can function as support. In finance market, a psychological level, is a price level in technical analysis that significantly influences the price of the underlying security, commodity or derivative. Usually, the number is something "easy to remember," like a number that is rounded up.
Meanwhile, Unfilled order is a shipment of orders that have not been fulfilled and inventory reported by domestic manufacturing companies. historically it can be seen that the balance between buyers and sellers is broken due to high volatility.
for example in the case of US30 23rd AUGUST 2022
Education excerpt: OPECThe Organization of the Petroleum Exporting Countries (OPEC)
The Organization of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organization with main goal to coordinate and unify the petroleum policies of its member countries. This pertains mainly to securing fair and stable pricing in the oil market; efficient and regular supply of petroleum to consuming nations and fair return on capital to the producing countries.
The OPEC was established in Baghdad, Iraq in 1960 by five countries. Founding countries were: Iraq, Islamic Republic of Iran, Kuwait, Saudi Arabia and Venezuela. One year later the organization was joined by Qatar in 1961. After that Indonesia and Libya followed in 1962. United Arab Emirates joined the cartel in 1967 and Algeria in 1969. Then Nigeria became member of the OPEC in 1971, Ecuador in 1973 and Gabon in 1975. Few decades later, Angola joined the OPEC in 2007, Equatorial Guinea in 2017 and Congo in 2018.
Ecuador suspended its membership in 1962. However, it rejoined the cartel in 2007. But then again in 2009 Ecuador withdrew its membership from OPEC. Similarly, Indonesia suspended its membership in 2009 and rejoined the cartel in 2016 only to leave it again in 2016. Gabon also suspended its membership in 1995. Although, Gabon reactivated its membership in 2016. Qatar was the last country to terminate its membership in 2019.
Current members:
1. Iraq
2. Iran
3. Kuwait
4. Saudi Arabia
5. Venezuela
6. Libya
7. United Arab Emirates
8. Algeria
9. Nigeria
10. Gabon
11. Angola
12. Equatorial Guinea
13. Congo
The OPEC's executive organ is called the Secretariat and it is run by the Secretary General. Secretariat was originally established in 1961. It also functions as headquarters for the organization. In the beginning, OPEC had its headquarters in Geneva, Switzerland for five years. However, OPEC's headquarters were moved to Vienna, Austria in 1965. Executive organ is responsible for implementation of all resolutions passed by the Conference. Secretariat also conducts research and fullfills all decisions made by the Board of Governeros.
The Secretary General is the representative of the OPEC who simultaneously acts as Executive of the Secretariat. The Secretary General is electable role and its term last three years. Although, there is possibility to renew this term once. The Secretary General is assisted by the Office of the Secretary general and several other officers and staff members of the OPEC. The Office of the Secretary general helps the executive chief of the Secretariat to maintain efficient relations with relevant international organizations and governments. Another important organ of the organization is the Legal Office which supervises legal matters of the Secretariat and provides legal advice to the Secretary General. In addition to that, there is also the Research Division that consists of three departments: Data Services, Energy Studies and Petroleum Studies. The Research Division is responsible for conducting research with regards to the energy and related matters. Infrastructure and services are provided by the Support Services Division.
OPEC Fund
The OPEC Fund for International Development is international finance development institution that was established in 1976. It consists of 12 members: Algeria, Ecuador, Gabon, Indonesia, IR Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates and Venezuela. Its purpose is to provide financial help to the developing countries and support advancement in these low-income and middle-income countries.
Disclaimer: This content serves solely educational purpose.
Today’s Notable Sentiment ShiftsHigh-Beta – AUD, CAD and NZD benefited from rising commodity prices on Tuesday, as markets set aside concerns about the spread of the Delta coronavirus variant. The notable outperformer in the commodities complex was oil prices, with WTI approaching $68 per barrel, up almost $2.50/+3% on the day.
Indeed, following today’s strong performance in WTI, TD Securities noted that: “With the impact on demand fueling chatter that OPEC+’s next monthly output hike could be delayed, and China’s “Zero-Covid” strategy appearing to have quickly contained the outbreak, crude oil could once again have a solid footing to challenge the $70s.”
BEST COMMODITY INTRA-DAY WTI CRUDE OIL 30 M TRADING STRATEGY#1 Add CCI Indicator with default 20 setting.
#2 Add a CCI 0 level line.
How to Filter Bad Trades.
A - Bad: when price action makes CCI take a long time to go from -100 to + 100.
B - Good: when price action makes CCImake a quick straight move from - 100 to + 100.
#3 Buy when CCL breaks above +100 level.
#4 SL below CCI +100 breakout candle.
#5 Exit trade when CCI crosses below 0 level line.
Crude oil Brokeout on ObservationLooks like market finally broke out to the upside, a long-awaited move.
OBSERVING CRUDE OIL IN A 1 MINUTE PERSPECTIVE (Visual Only)Someone brought this to my attention in oil chat and decided to have a look myself and you really do get to see so many tradeable scalping opportunities.
Never bothered to look at oil this way before, but this is very insightful to me, thought I ought to share.
If you are a pattern trader, then you really ought to start analyzing market this way in my opinion.
Highlight for this idea goes to @mikkel-j ... Now get pattern spotting guys.
BELOW IS A TEST CHART IN 1 MIN TO FOLLOW AND SEE IF PATTERN PLAYS OUT.
A Renko Strategy for Trading - Part 8This is intended more as educational material on a strategy for using renko charts. To begin with, I'll be using USOil in the examples but will include other markets as I continue through the series. The material is not intended to prescribe or recommend actual trades as the decision to place trades is the responsibility of each individual who trades as they assume all risks for their own positions and accounts.
www.investopedia.com
Chart setup :
(Part 1)
Double Exponential Moving Average (DEMA) 12 black line
Double Exponential Moving Average (DEMA) 20 red line
Parabolic SAR (PSAR) 0.09/0.09/.23 blue circles
Simple Moving Average (SA) 20 blue line
(Part 2)
Stochastics 5, 3, 3 with boundaries 80/20 dark blue/light blue
Stochastics 50, 3, 3 with boundaries 55/45 red
Overlay these two on one indicator. Refer to 'Part 2' as to how to do this
(Part 3)
True Strength Indicator (TSI) 14/4/4 dark blue/ red
Directional Movement Indicator DMI 14/14 ADX-dark green, +DI-dark blue, -DI-red
Renko Chart Settings
Crude Oil (TVC:USOil): renko/traditional/blksize .05/.10/.25
Natural Gas (ngas): renko/traditional/blksize .005/.010/.025
Soybeans/Wheat/Corn (soybnusd/wheatusd/cornusd): can use the ngas setup
S&P 500 (spx500usd): renko/traditional/blksize 2.5/5.0/12.5
Euros (EURUSD): renko/traditional/blksize .0005/.0010/.0025
