Eye of the market hurricane
09/05/18

●Last week WTI crude oil futures hit $70/barrel for the first time since July

●Prices spiked yesterday above $71 on weather-related supply worries

●Yesterday’s intraday reversal occurred at a prominent resistance level


 

No, we’re not speaking metaphorically about some looming episode of market volatility, we’re referring to a real meteorological event: Tropical Storm Gordon, which was expected to make landfall—possibly as a category-1 hurricane1—late yesterday on the Gulf Coast, affecting mostly Alabama, Louisiana, and Mississippi.

Aside from the genuine hardships such storms pose to the people and property in their paths, there’s something else that often accompanies Gulf Coast tropical storms and hurricanes: a surge in crude oil prices because of the potential supply disruptions that can result from them.

In early trading yesterday, October WTI crude oil futures (CLV8) appeared to be following this script, jumping nearly 2% to $71.40/barrel after pushing above the $70 threshold last week for the first time in more than a month:

October WTI crude oil futures (CLV8), 7/25/18–9/4/18. Crude oil futures daily price chart. Pop-and-reverse.

Source: OptionsHouse

It’s entirely logical for crude to jump on such news, given the uncertainties surrounding it (tropical storms and hurricanes, ironically, seem to be unpredictable in much the same way markets are), and just as appropriate for prices to decline if a storm turns out to be less disruptive than feared—in other words, the old “buy the weather forecast, sell the weather” scenario.)

Mid-morning yesterday meteorologists seemed to be anticipating the storm’s intensity being limited by prevailing atmospheric conditions,2 which may have had something to do with crude pulling back from its highs to the lower portion of the day’s range, and even briefly dipping into negative territory.

Traders who simply considered this price action in isolation would be missing out on some potentially actionable information: The longer-term October crude oil chart (below) shows the market yesterday had bumped its head pretty close to the same spot it did in May, June, and July—a now well-defined resistance level from which prices have retreated three times.

October WTI crude oil futures (CLV8), 1/22/18–9/4/18. Crude oil price chart. Hit resistance.

Source: OptionsHouse

That’s no guarantee the same thing will happen this time, especially if the storm turns out to be worse than expected, but some history worth considering is the crude market’s behavior after episodes similar to yesterday’s price action. Over the past 11 years, for example, there have been 54 other times WTI crude oil futures have made at least a new 20-day high, traded at least $0.50 above the previous day’s high, and then sold off into the bottom third of the day’s range. Five days later the market was lower 57% of the time for a median loss of $0.42. (The first day after these patterns was more of a toss-up, however, with the market lower only 52% of the time, and sometimes rebounding sharply).3

For reference, the arrows in the previous chart mark the times this pattern has occurred since January 25. Even this handful of examples shows the result after any given instance range anywhere from an immediate downturn (March) to additional upside (May), and anywhere in between (April).

Bob Dylan once sang, “You don’t have to be a weatherman to know which way the wind blows.” In this case, some traders may have taken note of the interesting mash-up of technicals, fundamentals, and price history to figure out which way the crude may flow.

 

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1 CNN.com. Gulf Coast prepares for Gordon's expected arrival as hurricane. 9/5/18.

2 Accuweather.com. Tropical Storm Gordon to strike US Gulf coast at near hurricane strength Tuesday evening. 9/4/18.

3 Supporting document available upon request.