Crude Oil and The Butterfly Effect

After falling below US$27.00 in the early months of 2016, the price of West Texas Intermediate Crude Oil has since moved steadily higher. Last week, Crude Oil traded to a three year high of US$69.56 per barrel, a move which appears to have caught the attention of U.S President Donald Trump.

President Trump tweeted over the weekend “Oil prices are artificially Very High! No good and will not be accepted!” The timing of the tweet coincided with a meeting of OPEC representatives who were in Saudi Arabia to discuss avenues to limit supply and support oil prices. There is some suggestions that Saudi Arabia would like to see Crude Oil prices return to above US$100 per barrel.

The price of Crude Oil has far reaching tentacles throughout the real economy. From influencing the cost of production and manufacturing, to the cost of purchasing an airline ticket, to purchasing petrol for the family car. Rising Crude Oil prices also contribute to higher inflation. This relationship was perhaps on the mind of bond traders as the U.S 10y Treasury yields surged higher to close the week at year to date highs of 2.95% (chart 1) despite a somewhat softer patch of U.S economic data of late and a fall in equity prices on Friday.

If you recall it was the rise above 2.65% in US 10y Treasury yields at the end of January/ late February this year that was partially blamed for the recent correction in global equities indices. Based on the links between markets highlighted above it is very important for traders to keep an eye on the price of Crude Oil in coming weeks as well as to have in mind some key upside medium term technical levels for Crude Oil.

As be seen on the monthly Chart below (Chart 2) there is a confluence of major technical resistance levels in the ~ US$72.00 area. (Allowing +/- $2.00 leeway either side).

• The multi year decline from the US$147.27 high in 2008 to the US$26.05 low in 2016 has a 38.2% Fibonacci retracement at ~US$72.39. (Blue)
• The decline from the 2011 high of US$114.83 to the US$26.05 low has a 50% Fibonacci retracement at US$71.31. (Pink)
• The wave equality projection target from the US$26.05 low is ~ US$71.34. (Purple)

Our expectation is that Crude Oil will struggle to break the resistance zone at least on its first attempt. However, if Crude Oil were to break and close much above US$74.00, it has the potential to rally towards U.S$85.00 per barrel. This would likely be the catalyst for U.S 10y Treasury Yields to continue their rally towards 3.25% and also spark greater volatility across FX and Equity markets. Essentially, The Butterfly Effect at work.

Source Tradingview. The figures stated are as of the 23rd of April 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

DISCLAIMER

TECHFX TRADERS PTY LTD (ACN 617 797 645) is an Authorised Representative (001255204) of KP International Group Pty Ltd (ABN 88 134 818 170 | AFSL No. 334191). The information contained in this report is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser. This report is intended solely for the information of the person to whom it is provided by TECHFX TRADERS, and has been prepared without taking into account your particular circumstances and needs. The information in this report should not be taken as constituting or relied upon as being personal financial product advice. Although every effort has been made to verify the accuracy of the information contained in this website, TECHFX TRADERS, its officers, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained on this website or any loss or damage suffered by any person directly or indirectly through relying on this information. Opinions constitute TECHFX TRADERS’s judgement at the time of issue and are subject to change. Past performance is not a reliable indicator of future performance. TECHFX TRADERS owns copyright in the information and material provided contained on this website. Information may be printed or downloaded for personal use. The information may not otherwise be reproduced and must not be distributed or transmitted to any other person or used in any way without the express approval of TECHFX TRADERS.

Wholesale client
By signing up to TECHFX TRADERS you acknowledge that you are a wholesale client as defined in at least one of the below criteria
What is a wholesale client?
High Net Worth Investor
A person or entity who has either: a) Net assets of $2.5 million or more; or b) A gross annual income of $250,000 or more for each of the last two financial years.  To apply under this category, a qualified accountant must certify that the person or entity satisfies this criteria and the certification must be no more than six months old. Professional Investor
A person or entity who: a) Has or controls gross assets of at least $10 million (this may include funds held by an associate or under trust); b) Holds an Australian financial services licence; c) Is a body regulated by APRA other than a trustee of any of the following within the meaning of the Superannuation Industry (Supervision) Act 1993: (i) A superannuation fund; (ii) An approved deposit fund; (iii) A pooled superannuation trust; or (iv) A public sector superannuation scheme; d) Is a body registered under the Financial Corporations Act 1974; e) Is the trustee of: (i) A Superannuation fund; or (ii) An approved deposit fund; or (iii) A pooled Superannuation trust; or (iv) A public sector superannuation scheme  within the meaning of the Superannuation Industry (Supervision) Act 1993 and the fund, trust or scheme has net assets of the least $10 million; f) Is a listed entity or related body corporate of a listed entity; g) Is an exempt public authority; h) Is a body corporate or an unincorporated body that: (i) Carries on a business of investment in financial products, interests in land or other investment; and  (ii) For those purposes, invests funds received (directly or indirectly) following an offer or invitation to the public within the meaning of Section 82 of the Corporations Act 2001 (Cth), the terms of which provided for the funds subscribed to be invested for those purposes; i) Is a foreign entity that, if established or incorporated in Australia, would be covered by one of the preceding paragraphs. To apply under this category, a Professional Investor Declaration form must be completed and supporting evidence that you meet the criteria must be provided.  (Only one of the above paragraphs need apply).
Large Business
Being a business that employs not less than: a) 100 people if the business is or includes the manufacture of goods; or b) 20 people in all other cases. To apply under this category, supporting evidence that you meet the criteria must be provided.
Significant Investor
A person or entity who invests at least $500,000 in any one opportunity and the minimum investment amount is $500,000.
Section 761GA Investor – Sophisticated Investor
A person or entity who is receiving a financial product or service not in connection with a business and meets the criteria contained in Section 761GA of the Corporations Act 2001 (Cth) as set out below:  a) The financial product being provided is not a general insurance product, a superannuation product or an RSA product;  b) The person or entity has established that it has previous experience in using financial services and investing in financial products that enables it to assess:  (i) The merits of the product or service; and (ii) The value of the product or service; and (iii) The risks allocated with holding the product; and (iv) The client’s own information needs; and (v) The adequacy of the information given by the licensee and the product issuer.  To apply under this category, sufficient evidence must be provided to satisfy GFIN Financial Solutions and an acknowledgement pursuant to Section 761GA(f) of the Corporations Act 2001 (Cth) must be provided once GFIN Financial Solutions is satisfied that you meet the requirements.