Oil Collapse | WTICOUSD About to Give it Up!I called the oil top in June 2022 and I have been building / holding a massive leveraged short position ever since then.
This market will take YEARS to recover, after the current selloff is complete. I will continue to cover the devastation, along the way.
Don't listen to the media - they are lost.
Question your "advisors" - they are going to encourage you to "stay invested", it's what they do.
Ultimately, the decision to ride out this market will cost you dearly.
If you are able, GET OUT OF THE MARKETS.
There is nowhere to hide!
Oilmarkets
Managing Oil Price Uncertainty with Micro WTI StraddlesYou cannot predict the future, but you can prepare for it. This is even more true for crude oil prices. Forces driving and pulling back oil prices are in full play in parallel at the same time. Oil prices remain at the risk to both the upside and the downside concurrently.
Take this week as an example. WTI prices started with a rally extending a three-day uptrend of >7% following Fed’s hint at rate cuts plus heightened tensions between Israel and Hezbollah. The rally reversed as tensions eased. Crude oil prices crashed 3.8% over Tuesday & Wednesday on fears of feeble demand.
RATE CUTS AND GEOPOLITICAL TENSIONS DRIVE OIL PRICES HIGHER
The US Federal Reserve Chair Jerome Powell has signalled that the time to pivot was about now when speaking at the Jackson Hole Symposium last week on 23/Aug. This boosted optimism for oil prices, fuelling a rally reversing a price slump caused by weak Chinese economic data and disappointing US payroll revisions.
Chair Powell’s remarks lifted market sentiment, leading to gains in oil prices and the dollar weakening. A feeble dollar makes oil cheaper for non US consumers and can help increase demand pushing up oil prices.
Source: CME FedWatch Tool
According to CME’s FedWatch tool , there is a 67.5% likelihood of a 25 basis points (“bps”) rate cut and a 32.5% chance of a 50 bps rate reduction at the September FOMC meeting.
Sadly, the tensions in the Middle East continue to prevail. Last weekend, Hezbollah launched rockets and drones into Israel, prompting a swift response from Israel's military, which deployed around 100 jets to prevent a larger attack.
Adding to these factors are disruptions in oil production in Libya and Colombia.
The easing of tensions between Hezbollah and Israel reduced supply fears, with some speculating that Iran might view Hezbollah's missile attacks as sufficient retaliation.
Despite easing tensions, supply concerns persist in Libya threatening to reduce oil production by 1.2m bpd.
WEAKENING DEMAND AND OVER PRODUCTION COULD PULL OIL PRICES BACK
Concerns over weak oil demand from China, a global economic slowdown on the horizon, and elevated Russian crude production is keeping oil prices under check.
Russia has exceeded its OPEC+ production targets since March, leading to excess supply that is undermining the impact of OPEC+ production cuts and keeping prices low.
Source: OPEC and IEA
On Wednesday, the EIA reported a decline of 846,000 barrels in US crude inventories for the week ending 23/Aug, falling short of analyst expectations of a 2.7 million barrel drawdown. The market response to this smaller-than-expected inventory decrease was muted.
Demand for crude and gasoline will soften as US summer driving season ends first week of September.
Expectations of weaker US gasoline demand and lower refining margins have led several refiners to scale down their operations reducing demand for crude.
The largest US refiner, Marathon Petroleum ( NYSE:MPC ), announced that it will reduce its refining capacity to 90% this quarter, the lowest for a Q3 since 2020. PBF Energy ( NYSE:PBF ) will lower its capacity utilization to a three-year low, and Phillips 66 ( NYSE:PSX ) will cut its capacity to a two-year low.
Goldman Sachs and Morgan Stanley reduced their 2025 Brent crude forecast to USD 77/barrel and USD 75/barrel respectively. Reasons cited for reducing forecasts include weaker Chinese demand, higher inventories, oversupply from OPEC countries, and rising US shale production for the downward revision.
HYPOTHETICAL TRADE SETUP
Over the past two weeks, crude oil prices have been volatile for reasons mentioned above. Looking ahead, rate cuts in September, the ongoing crisis in Libya, and reduced US gasoline demand will fuel further uncertainty to oil prices in the near term.
This is evident from rising WTI crude oil implied volatility. Earlier on 05/Aug it slid from its YTD high of 44.7 but has started to pick up again.
Source: CME CVOL
Establishing a directional position amid such uncertain backdrop is rife with risks. Long straddles using Micro WTI Crude Oil Options offer an effective way to capitalize on rising volatility.
Straddles are designed to benefit from (a) significant price movements in the underlying asset regardless of the price move and (b) volatility spikes. Sharp oil price moves, and volatility spike are to be expected given the current context.
Straddles provides “unlimited” profit potential combined with limited downside risk. A straddle comprises of two trade legs, namely, a long ATM call option combined with a long ATM put option.
This paper posits a long straddle on CME Micro WTI options expiring on 17th September. Micro WTI options provide exposure to 100 barrels of WTI crude offering a smaller contract size and lower premium requirements.
Based on 30/August market prices, this hypothetical trade set-up uses CME Micro WTI Crude Oil options expiring on 17th September and involves (a) Buying a 76 ATM Call, and (b) Buying a 76 ATM Put.
The premiums for each leg and the corresponding option Greeks as shown QuikStrike Strategy Simulator are shown below for ease of reference.
The straddle requires USD 1.91 per barrel in premium for the long call and USD 1.8 per barrel for the long put. In aggregate the straddle would cost USD 3.71 a barrel. Each CME Micro WTI Crude Oil option comprises 100 barrels which translates to a premium of USD 371 per lot.
When Micro WTI Crude Oil futures trade past break-even points as shown in the chart, this straddle will deliver positive returns.
• Lower break-even point: 76 - 3.71 = 72.29
• Upper break-even point: 76 + 3.71 = 79.71
However, at expiry, if Micro WTI Crude Oil Futures prices settle between USD 72.29 and USD 79.71 a barrel, this straddle will incur a maximum loss of USD 3.71/barrel or USD 371/lot.
The straddle pay-off are summarized in the table below to augment the above chart, illustrating the potential P/L of this trade at a few settlement prices.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme .
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
The Future of Crude Oil“We are not addicted to oil, but our cars are”, said a former CIA Chief, James Woolsey. That addiction is on the decline as we pen this paper. Love it, or hate it, but you cannot ignore it. Crude oil powers the planet. When global economy stutters, oil prices plunge.
Midway through 2023, crude oil demand appears wobbly on recession overhang and shaky economic recovery in China. Meanwhile, crude supply remains tight with OPEC+ scaling back production which has been compounded by limited investment in new exploration.
Over the long term, energy transition is set to fundamentally change the oil market. Consumers are shifting to EVs and renewable energy. In a befitting response, producers are reducing supply.
Energy transition will be anything but a straight line. It will create many risks and present many more opportunities.
This paper is set in two parts. First, we highlight key takeaways from a recent IEA report on crude oil outlook until 2028. Second, we explore hedging & trading instruments on the CME Group for participating in oil markets.
PART 1: KEY TAKEAWAYS FROM IEA CRUDE OIL OUTLOOK REPORT
The International Energy Agency (IEA) released Oil 2023 last week. This report describes in detail the changing dynamics in the oil market until 2028. It discusses key trends such as slowing demand growth, shifting producer growth, and the impact of energy transition on oil.
Recent crises have accelerated the energy transition. With COVID-19 plus rattled geopolitics, nations are increasingly more focused than ever on energy security and independence.
Ten key takeaways from Oil 2023:
1. Global oil demand to rise by 6% or 5.9M bpd between 2022 to 2028, reaching 105.7M bpd. Despite this, emissions will fall 11% with efficiency improvements.
2. Annual demand growth is expected to slow sharply in the coming years from +2.4M bpd in 2022 to just +400K bpd in 2028.
3. India and China will drive demand over the next decade while consumption among OECD countries will shrink.
4. Oil demand for gasoline will peak this year and start to reverse going forward with accelerated EV transition. Demand for transport fuels is expected to peak in 2026.
5. Jet fuel demand is still lagging 2019 levels by 13% and is expected to rise rapidly but only surpass pre-COVID levels in 2027 with expected efficiency improvements.
6. The petrochemical sector will replace the demand for transport fuels. Demand from LPG, Ethane, and Naphtha will increase by 40% from now until 2028.
7. Production growth from shale is expected to slow due to rising costs and lower prices. US shale will mature to a higher-return-lower-growth trajectory.
8. Global upstream oil and gas investment is projected to increase by 11% year-on-year in 2023, reaching USD 528 billion. This represents a rise from USD 474 billion in 2022.
9. Non-OPEC+ countries, including the United States, Brazil, and Guyana, will lead the medium-term capacity expansion plans. They are expected to contribute to a supply boost of 5.1M bpd.
10. By 2028, an additional 5.9M bpd of net production capacity will come online. The rate of new capacity building will decrease over time, aligning with projected demand growth.
Following four charts help visualise the large shifts underway in the crude oil market:
1. Price Sensitivity to Imbalance: Crude oil prices are highly sensitive to imbalances between production and consumption. Over the past 25 years, consumption has been marginally higher than production. Where deficit rises, spot prices rally.
2. Consumption between developed markets (DM) and emerging markets (EM): Consumption in EM will further outpace OECD countries. Consumption across EM overtook OECD in 2013 and this trend will be further entrenched. IEA forecasts that consumption in OECD countries will hit its apex this year.
Thereafter, it will start shrinking going forward. In sharp contrast, EM consumption will rise by 7.8M bpd between 2022-2028.
3. India to surpass China by 2027: Although both countries will continue to see demand increase, India will surpass China as the main source of growth by 2027.
4. Non-OPEC+ will be the primary source of growth in oil production: Production growth from OPEC+ will remain intact, while non-OPEC+ countries will be driving production growth.
PART 2: CRUDE OIL DERIVATIVES
CME offers a variety of instruments for producers, consumers, and investors to participate in the crude oil market. This includes WTI Futures & Options and Brent Futures & Options. Beyond these, CME also operates markets in a range of refined oil products, fuel oil, and natural gas.
In a previous paper , we highlighted the 40-year history of CME Group’s WTI crude oil derivatives. With an extensive suite of derivatives on offer, CME Group enables multiple alternatives for different market participants.
Futures
WTI Crude is a widely used global benchmark for oil prices. It is the underlying for one of the most liquid futures contracts in the world – the CME Crude Oil Futures ("CL Futures"). CL Futures is a physically delivered contract with tight correlation to the physical oil market.
Over one million contracts change hands daily, representing USD 7+ billion in notional value. Each lot of the CL Futures contract represents one thousand barrels of crude oil. CL Futures provide deep liquidity and high-quality market structure for hedgers and investors to participate in and protect against oil price volatility.
Monthly contracts are available over the next ten calendar years. Front month contracts are easily tradable on CME Globex electronic order book. Longer dated contracts require engagement with inter dealer brokers for price discovery and voice-based trade execution.
Alternatively, CME’s Micro Crude Oil contract (MCL) offers exposure to just 100 barrels with a maintenance margin of just USD 580 (as of 23rd June), enabling affordable participation into these markets. The micro contracts allow hedgers to manage risk exposure with greater precision.
Options
Monthly options are available on the underlying CL futures. They are deeply liquid with seamless order book-based trading on CME Globex.
Open interest on the front month contract is >300,000 lots, representing premium of more than USD 1 Billion across calls and puts. More than 20,000 contracts are traded daily.
Weekly options are used to fine-tune exposure around key events such as OPEC+ meetings and interest rate announcements. Daily options are available for CL Futures. Monthly and weekly options are also available on Micro Crude Futures.
CME provides calendar spread options and mid-curve options which can be used as tactical trading and hedging tools given the seasonality of oil markets.
Trading Strategies
There are innumerable ways of trading the crude oil market. Most popular among them include (a) taking directional position using futures and options, (b) establishing shrewd hedges or convex trading strategies using options, and (c) trading delta-neutral calendar spreads gaining from relative shifts across the futures term structure.
Previously we have covered different trading ideas in crude oil, including taking a directional position - (a) Is US Oil running low on energy? (b) Is WTI crude set to rebound? (c) Three headwinds to send crude oil into free fall , (d) Harnessing gains from mean reversion in crude oil markets , and (e) Rebounding air travel & rising China to fire up WTI crude.
In our next paper, we describe the mechanics involved and illustrate the workings of popular trading strategies.
KEY TAKEAWAYS
In conclusion,
1. The Crude oil market is at the cusp of substantial change as energy transition powers on.
2. Change will be a constant. Impact on price will be anything but a straight line, creating both risks for the uninitiated and opportunities for the astute.
3. CME Group’s deeply liquid market with broad range of instruments enables market participants to harvest gains in risk-mitigated ways and to lock in credible reward to risk ratios.
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. 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
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
OIL SHORT BACK TO MAIN TREND IF CLOSE OUTSIDE 50 MOVING AVERAGEHi there,
As you see on the chart, OIL has closed below the 50MA on the daily time frame. We need to see a full candle close below 50MA for short. It is still above the 200MA so still a bullish trend up. But we may want to catch the fall back to the main trend. You can see our entry and profit target.
Profit target = next support point.
Entry Point = Ideally we should wait for a retest and reject from the 50MA to enter for the fall.
Indicator:
> MACD = showing sell but need more sellers
> RSI = below 50, need more strength to the down side
We don't want to see OIL close inside the symmetric triangle.
kind regards
BCO LONG OIL WTI LONGOil Price forecast for March 2022.
In the beginning price at 107.02 Dollars. High price 139.13, low 90.50. The average for the month 107.13. The Oil Price forecast at the end of the month 91.88, change for March -14.1%.
Brent oil price forecast for April 2022.
In the beginning price at 91.88 Dollars. High price 91.88, low 84.91. The average for the month 88.72. The Oil Price forecast at the end of the month 86.20, change for April -6.2%.
Oil Price forecast for May 2022.
In the beginning price at 86.20 Dollars. High price 92.91, low 86.20. The average for the month 89.21. The Oil Price forecast at the end of the month 91.54, change for May 6.2%.
Brent oil price forecast for June 2022.
In the beginning price at 91.54 Dollars. High price 98.68, low 91.54. The average for the month 94.75. The Oil Price forecast at the end of the month 97.22, change for June 6.2%.
Oil Price forecast for July 2022.
In the beginning price at 97.22 Dollars. High price 104.80, low 97.22. The average for the month 100.62. The Oil Price forecast at the end of the month 103.25, change for July 6.2%.
Why Oil Crashed Back Below $100
After a torrid three-week rally, energy markets have entered correction mode, with prices moving sharply lower. Over the past week, Brent has slipped 30% from the 7 March intra-day high while European gas prices have declined 65%.
Brent for May delivery settled at USD 106.90 per barrel (bbl) on 14 March, a w/w fall of USD 16.31/bbl, and moved below USD 100/bbl in early trading on 15 March. WTI for April delivery fell USD 16.31/bbl w/w to USD 106.90/bbl at settlement on 14 March, while the value of the OPEC basket fell by USD 15.84/bbl to USD 110.67/bl and by EUR 15.40/bbl to EUR 101.16/bbl.
You can blame speculative overshoot for the unfolding scenario though the overall outlook remains bullish.
According to Standard Chartered commodity analysts, the correction tells us more about market positioning and the effect of extreme volatility than it does about changes in fundamentals over the past week.
The increase in volatility across financial and commodity markets has led to a sharp rise in the level of risk held by traders, and an associated incentive to close out some positions to lower the risk. Oil traders have mostly been positioned with a highly bullish bias in terms of both outright positions and spreads in recent weeks, meaning optimization in a higher-risk environment has mostly involved closing out prompt longs. With speculative shorts being very thin on the ground currently, there have been few natural buyers, and the downside has quickly opened up. While the price ranges involved have been rather extreme, recent price dynamics bear all the hallmarks of a textbook speculative overshoot followed by the correction necessary to reset extreme positioning.
The irony of the situation is that the dominance among oil traders of the belief that prices could only move higher has led to a position from which market dynamics dictated that in the short term, prices could only go lower.
Replacing Russian Oil
Despite the positioning-led price fall, StanChart says that the key fundamentals are largely unchanged and are also subject to an unusually high level of uncertainty.
According to commodity analysts at Standard Chartered, Russian oil flows to Europe can be replaced in the short term, with the short-term price implications of that displacement potentially capable of being minimized by the extent to which OPEC members increase output beyond their current OPEC+ targets, and also by the possibility of a successful conclusion to talks in Vienna that results in higher volumes of Iranian exports.
The analysts have projected that consumer reluctance to buy from Russia coupled with shortages of capital, equipment, and technology will continue to depress Russian output over at least the next three years. Russian output is expected to fall by 1.612 million barrels per day (mb/d) y/y in 2022, and by a further 0.217mb/d in 2023, with the y/y decline peaking at 2.306mb/d in Q2-2022. To avoid significant upside price pressure, StanChart reckons that the market would require around 2mb/d extra supply for the remainder of 2022, and an additional 2mb/d in Q2 to ease the dislocations caused by the displacement of Russian oil. The temporary 2mb/d Q2 boost could come from strategic reserves, but the 2mb/d additional flow for the remainder of 2022 would likely need to come from OPEC sources (including potentially Iran).
Market tightness is, however, being helped by the fact that withdrawal from Russian markets has been less dramatic than anticipated.
So far, there are indications that some of the larger EU countries are less keen than countries in the east of the EU to pursue the fastest possible reduction in Russian oil flows. Outside of the EU, the UK’s ban on the import of Russian oil has proved less dramatic than the headlines that accompanied the initial announcement, as it does not take effect until the end of 2022. In the private sector, while several companies have given assurances they will buy no more Russian oil on the spot market, there have been very few indications given about if, when, and how they will cut the volume of Russian oil purchased through their term contracts. Meanwhile, statements from some governments and some companies do appear to have become less hawkish over the past week, with an apparent lengthening of the timespan envisaged for the process of reducing dependence.
StanChart says that Russian oil trade into Europe appears to be moving further into the shadows of term contracts and a greater reliance on third-party trading intermediaries. That does not make trading with Russia any less distasteful for European public opinion, but it does make the trade less visible and thus likely keeps oil flows from Russia higher than they would have been with more direct government targeting of those flows.
USOIL further bullish continuation! | 3rd March 2022Prices are on strong bullish momentum. We see the potential for further bullish continuation from our buy entry at 108.95 in line with 23.6% Fibonacci retracement towards our Take Profit at 115.55 in line with 200% Fibonacci Projection . Our bullish bias is further supported by prices trading above our ichimoku clouds .
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RUSSIA VS UKRAINE Hello every one i said about oil 2 weeks ago now i updated this chart and added new idea about oil
ok. as you see Oil can see higher prices and after reaching the specified points can fill its inefficiencies and come down on the other hand because in this chart in the weekly time frame we have meditation and all areas of demand have been consumed can fall well after the Ukraine-Russia war
But as I said, this chart wants to experience prices from $ 105 to $ 120 and then come down.
I wish you a good day.
OILhello dear treaders any news from oil ? ok.. let me read the chart oil. first of all lets take look at the oil chart We see that oil is rising sharply Now at what price can this price increase continue? No one knows But the traces of investors can be understood from the chart. Of course, one of the factors that has oil rising in this way is the tension between Russia and Ukraine.
In the oil chart, I see resistance from $ 100 to $ 105 even higher, but it is also possible that all of this will be broken because of the Russia-Ukraine war.
But if nothing happens and there is no war, the high resistances that you see in the chart can be activated and the price will fall.
If the price falls, it falls well because there is no demand area to keep the price because they are all consumed.
At the moment, in this political crisis, I can neither signal buying nor selling, I just have to combine all of these so that I can give you the right analysis.
Good luck.
usoil (strong supply zone!)as you can see we are in a very strong supply zone that can led to the price of oil come down to 45$ but if that area broke to the upside it could go upside till 110$ so for now we will be just be waiting to broke one of this zones but im more bearish on it than be bullish
Demand fullfilled, are they ready to drive into $77 region?The bullish structure on weekly timeframe looks pretty good if you ask me. In the coming day's, i think we're going to see more bullish momentum at the charts.
Back to the daily:
It looks like price might be heading north soon. The daily demand is about to be fullfilled.
In my opinion this is a safe zone for long entry's. And also a great opertunity for higher Risk/Reward ratios.
The stoploss should be safe just below the demand box. I'm targetting the liquidity around $77.
Eyes on oil again! Trading Views and Ideas, 04.06.2021, by MarioWow it was a crazy week for oil..! Quite volatile I would say! However, the market moved eventually as expected, quite rapidly though to significant high levels. I wasn’t expecting such a big rise so soon.
Previously we said: “Falling below 65 USD per barrel would give me negative signals relating to an oil demand boost” > Which of course did not happen. Instead the price started to rise as per my expectation to higher and higher levels, from 65 USD per barrel to over 69 USD per barrel.
I would expect the same level of lolatility upwards. OPEC ofcourse can affect the price quite significantly at any time so we have to keep a good eye on their actions and intentions. For now, demand for fuel and services this summer seems to give a good boost and supply could fall short. My initial thoughts were 75 USD per barrel in middle of August and still support it.
#forextrading #currencytrading #forexmarkets #forexeducation #forexanalysis #forextraining #index #indices #stocks #investment #onlinetrading #oilprices #oilmarket
WTI - OIL ANALYSES
Oil prices are as shown below :
Peaked at 1 July 2008 -147 $ plummeted to 35 $
Peaked at 1 July 2014 -107 $ plummeted to 28 $
Peaked at 1 July 2018 - 77 $ plummeted to 21 $ (You can see this in my profile exactly predicted in September 2019 as of 21 $)
Will Peak at 1 July 2020 -60 $ will plummeted to 9.71 $
So until July 1 2020 May be long after badly short.
Markets scare and there is something to be afraid ofOn Monday, the markets were finally really scared. The coronavirus epidemic is becoming global, and the economic consequences are increasingly threatening. Every day, China's downtime literally increases the problem exponentially.
Actually, some analysts are already talking about the critical level of problems and damage. For example, a survey of managers of more than 1,500 Chinese small and medium enterprises (small and medium enterprises accounted for 99.8% of all companies registered in China and 79.4% of all employees work in them) showed that 85% of them will use up all their cash reserves in 3 months. But this is a potential threat. As for the real ones (that is, the damage that has already been done), 50% of respondents said that an outbreak of coronavirus will reduce their annual profit by at least 50%.
And according to the latest Dun & Bradstreet research from the list of Fortune 1000 companies, the main supplier is China for 163 companies, and for 938 China is a second-tier supplier, that is, their main supplier depends on supplies from China.
Thus, the level of dependence of the world economy on China is critical - about 94% (!). Accordingly, the problems will increase like a snowball. And lowering Apple’s forecasts last week will seem like an innocent joke compared to what the global economy can really expect. In the best case, corporations will sag strongly in profits, and in the worst, they will greatly sag in income.
Not surprisingly, the Fear Index (VIX) showed 50% growth during the day. It is rather surprising that he has not grown recently. And the gold maximums in the region of 1700 - this is not all that the asset wanted to say on this subject, and sales on the global stock markets by and large just started.
The yield on thirty US Treasury bonds, meanwhile, reached a historic low. Which, in general, explains why the dollar has recently felt so confident in the foreign exchange market.
Our basic positions today are unchanged: we are looking for points for buying gold (but given the strong oversoldness of the asset, we are doing this conservatively and with obligatory stops), we sell oil, we sell EURUSD, we buy GBPUSD, we sell USDJPY with small stops.
The week results: the epidemic swing, the yen statusThe coronavirus epidemic continued to be the main focus of financial markets last week. And if the week began with a rather optimistic attitude of investors against the background of a decrease in the number of new cases of disease and deaths, then it ended on a very minor note: the epidemic spread to South Korea and Japan.
In addition, analysts after the warning increasingly began to think about the consequences of the epidemic and quarantine in China (Goldman Sachs estimates that economic activity in China does not exceed 50%). And the longer restrictive measures last, the worse the mood of investors. They can be understood: dozens, if not hundreds of millions of Chinese, temporarily do not work and lead an exclusively isolated lifestyle. As a result, production does not work at full capacity, the transport system is partially paralyzed, consumption has fallen sharply, the clouds over global supply chains are gathering more and more with each day of downtime. That is, an economic epidemic is beginning, which could very well become a global pandemic.
Not surprisingly, against this background, gold is updating the highest mark since the beginning of 2013 and continues to confidently move to the 1800 area.
The current week in terms of the epidemic is likely to change its focus. If before that all attention was focused on China, and the whole epidemic was geographically localized. Then this week, investors will focus not so much on China as on other countries where the number of diseases has risen sharply: Japan, South Korea (last week the number of cases doubled almost every day), Italy and Iran. Judging by the current dynamics, it is likely that the reserve of bad news has not yet been exhausted.
As a result, the stock markets finally broke down and rained down. It will be difficult to say whether the current sales will become the beginning of a full correction, but there are all the prerequisites for this.
Another injured last week was the Japanese yen. After the failed data on GDP growth rates in the 4th quarter, everyone realized that the third-largest economy in the world is one step away from the recession. As a result, the status of the yen as a safe-haven asset is damaged. However, we will not write off the yen from the accounts and will sell it within the day simply because the pair climbed very high (with mandatory small stops because we are reporting that we are going against the will of the market).
Europe has traditionally already disappointed in terms of macroeconomic statistics and the general state of affairs, especially in Germany. Accordingly, the talk of a global recession against the backdrop of the problems of Japan and the Eurozone no longer seems fabrications and conspiracy theories.
For fairness, we note that on Friday the data on business activity indexes in the Eurozone came out better than forecasts at the highest levels for the last 6 months, but so far this is only a drop of positive in a sea of negativity. In the UK, production growth generally showed a 10-year high, which allowed the pound to perk up and work out our recommendation on its purchases.
As for macroeconomic statistics this week, the week promises to be quite calm. So you can focus all your attention on the news about the epidemic and expert estimates of the extent of damage both for China and the world as a whole. Our basic positions for the current week are as follows: we are looking for points for buying gold (but given the strong oversoldness of the asset, we are doing this conservatively and with mandatory stops), we sell oil, we sell EURUSD, we buy GBPUSD, we sell USDJPY above 112 with short-stops.
Investors doubt and China operates at half capacityBefore investors could relax and believe that the worst was over, a new portion of reasons for concern arrived. It is about spreading the epidemic outside of China. Recall that almost 99% of everything related to COVID-19 took place in China. And investors at some point decided that everything that happens in China remains in China.
Yesterday forced some to reconsider their position. The number of people infected in South Korea rose sharply (it jumped from 32 to 82 in a day, but more importantly, most of the newly diagnosed cases were parishioners of one church, where about 1,000 people were present at the time of infection, that is, we can expect a further increase in the number infected) and Japan (more than twice as many as 84 people jumped in a week), the first deaths appeared in Japan and Iran. All this makes us think about the spread of the epidemic around the world with all that it implies.
By the way, about the resulting. China very clearly demonstrates what price has to be paid. Goldman Sachs experts analyzed data on a number of direct and indirect indicators, in particular, statistics on finished goods production, demand for steel and its reserves, coal consumption and real estate sales in China, and a number of other indicators, and concluded that economic activity in China does not exceed 50% of the average indicators of past years.
That is, as we warned, it is too early to relax, the events are still in the process of development, and their consequences will become clear only after some time.
Against this background, gold traditionally feels comfortable, which continues to stubbornly move towards the goal that we voiced a few weeks ago (1800 mark). But the yen’s problems continue and there are active rumors in the market that the currency is losing the status of an asset-refuge.
Despite the current problems of the yen and the high likelihood of its further decline, sales of the USDJPY pair above 112 look too tempting to not try to catch a u-turn with small stops. Moreover, today is Friday - potentially the day of profit-taking. And the yen has something to fix.
Considering how depressing statistics have recently been from the Eurozone, one can expect another batch of weak data from Europe and a new round of euro sales. So you can even sell the EURUSD pair without waiting for the data.
In addition to the euro, today we will sell oil, a pair of USDJPY (above 112), buy GBPUSD with small stops, and also look for opportunities for buying gold.
Recession in Japan, China's stimulus and UK’s dataPerhaps the main event and surprise of yesterday were the devastating data on Japan's GDP for the fourth quarter. The country's GDP fell by 1.6% (the forecast was a decline of 0.9%) in terms of q/q and 6.3% in relation to the same quarter last year (the worst result since 2014). This is a very alarming signal for the global economy because Japan is the third-largest economy in the world. And although the reasons for such a failure are generally justified - a destructive typhoon and tax increases, the picture does not become less depressing.
Given that China is Japan's largest trading partner, there is every reason to expect weak data in the first quarter of 2020 (consequences of the coronavirus epidemic). Do not forget about the loss of the tourism sector in Japan from China's ban on the travel of citizens. We are talking about hundreds of thousands of tourists from China who were supposed to visit Japan but did not visit with all the ensuing economic consequences.
The second consecutive quarter of GDP decline is already officially a recession. That is, what we have been talking about for quite some time in our reviews is beginning to take on an increasingly clear line.
What is characteristic, the Japanese yen against the background of such crushing statistics were not exposed to sales. Obviously, the demand for a safe haven asset in her person outweighs the desire to sell the yen to work out weak data. In this light, our desire to buy gold only intensified. Purchases of the Japanese yen, despite such weak data, also look good from current points.
China, meanwhile, maybe trying to generate optimism after several weeks of continuous negativity. And this is not only about the statistics on the epidemic, which is beginning to decline but also about the position of the Chinese authorities, who yesterday promised to strengthen the stimulation of the economy in order to compensate for the negative consequences of the coronavirus. It is planned to reduce corporate taxes and increase government spending.
Despite this positive, we believe that the damage has already been done and the world economy will still feel it in the first quarter. And the epidemic itself is still ongoing. According to experts, the Chinese economy will return to less or less normal functioning no earlier than in a month.
In this regard, we recall our recommendation to sell oil. Demand for oil from China continues to fall, and refinery loading drops at a gigantic pace (at some plants, the decline was 10-20%). According to Citi analysts, the total volume of oil refining in China fell by 2 million barrels per day, while oil demand in China in February may show a decrease of 3.5 million BPD. These are very serious figures for the oil market. So we use any attempts to grow the asset as an occasion for its sales.
For the British pound today is a pretty important day in terms of macroeconomic statistics - a block of data on the UK labor market will be published. In the past couple of days, the pound has somewhat lost its fuse, which was received in the form of promises to increase government spending. Today's data can either increase pressure on the pound, or give it the opportunity to return to growth. So we follow the numbers and adjust the positions depending on the nature of the data.