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US500Oil

Energy vs tech - one's hot one's not

Chris Weston
Chris Weston
Head of Research
Oct 4, 2021
The story of the day is undoubtedly energy – WTI crude has broken above the double top high of $76.98 and now trades the highest levels since November 2014.

Brent crude has closed 2.5% higher and above $81 – the highest levels since October 2018. Natural gas closed +4.9%, and again this is not a new story, but an extension of the rampant bull trend.

OPEC made the call to keep marching on with its plans to increase output by 400k b/d and it seems this was good for $2 on the crude price. Clearly the market was positioned for the possibility of a further increase in output, notably after Saudi Aramco CEO Amin Nasser said the lift in nat gas had resulted in a rise in the demand for crude by 500k b/d. The market has renewed confidence of an ongoing deficit near-term and fundamentally this certainly justifies the breakout in price we’ve seen.

Reading the tape, the message the oil market heard is that OPEC are happy to keep pushing prices higher and while that dynamic may change if US shale producers come to the party and ramp up production, that fundamental input is a slow-moving ship – this is why many are watching the weekly rig count stats.

Brent and WTI crude are in breakout territory

This is where the science of trading breakouts comes to its own. The first port of call is we’ve seen the daily bar close above the July highs, but it needs to build from here and if it does then the momo players will add to longs – I guess the bulls would have liked a close above $78 in WTI crude and we’ve seen some selling into the figure, as we did in Brent.

Our client positioning is nuanced here, with a balanced skew of long and shorts in both instruments. I guess you have a blend of momentum/trend players against mean reversionist all coming together into one aggregated position.

We’ve seen some playing the crude moves in the ETF space, with the XOP (oil and gas explorer ETF) and XLE ETF (S&P 500 energy sector) seeing good buyers, with the XOP having a solid break out. The XLE is yet to take out its June highs and had a look into $55 and found some supply. The IXC ETF (global energy ETF) is another that vehicle traders can look at to express a view on crude.

The nat gas story is one that has certainly caught many people's attention of late – few predicted we’d have seen such explosive price action and it seems to trade NG from a fundamental stance you almost have to be a meteorologist. The trade has been to sell and accumulate short positions on rallies above $6.00 and some are saying that if weather patterns are less cold than feared in the Midwest and the Northeast, we could see that come out of the price and a move back towards $5 – obviously that wont happen overnight.

Moves in energy have thrown weight to the stagflation argument

Although we’ve only seen modest selling in US Treasuries and there has been no rush back into the USD. FX markets are mixed on the day. The same cant be said for equities (ex-energy), where we find tech getting slammed, with the NAS100 -2.2% and the NAS VIX index has pushed nearly 3 points higher.

Facebook has been crushed – with a number of factors at play including news on the whistleblower and a lengthy outage across the app. Personally, I'm not sure the former issue is that big a concern for shareholders, but it adds to the buyers strike, many who are happy to wait until earnings on 29 October. That date seems a way off and if US real rates push higher then the bid will stay out of the market and price will head lower - the 200-day MA at $315 beckons. Names like Nvidia, Peloton and even Amazon are starting to attract more short interest here.

Robinhood has now fallen for 8 straight days – catching a falling knife or is this one for the mean reversion players? Trade the potential opportunity with Pepperstone.

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