Several key factors leading to higher crude prices

August 31, 2015 04:02 PM

Relative stability is the phrase that best describes the price discovery across the commodity landscape from this morning. The equity markets were down 25 handles, which in regular market conditions would be a big move to the downside.

However, compared to the recent market conditions, this has presented itself as a calm and orderly market. With the Chinese stimulus now having had some time to have some stabilizing effect on the market, the United States seems ready to return to a trade scenario based more on the direct fundamentals of the U.S. economy. 

Crude oil is the big story again today following Friday’s sharp rally. There are several factors that have led to the higher price discovery. 

First, the relative aforementioned stability in China that has had a calming effect across the commodity markets certainly did a lot to stop the recent landslide in energy pricing. 

Secondly, the geo-political developments of late in Yemen and the Ukraine have led to some added bullish price action as market participants look to hedge against any possible escalations in these troubled regions. The war torn nation of Yemen is certainly a hotbed that could develop into something more systemic as the Saudis continued to bomb and even march on the southern part of the country. With a civil war of this type, there is always the danger of the unknown, particularly when foreign sovereignties get directly involved militarily. While this type of news does warrant buying in the crude, many times it ends up being a case of "buy the rumor, sell the fact" scenario if the escalation fails to spread. 

Finally, today's EIA report on U.S. production for the first half of the year showed a dramatic reduction in production compared with what the market was pricing in. While this did come as a shock to many who have been calling for continued lower pricing based on the oversupply of crude this past month, when looking at the weekly inventories for the past 3 months or so, it makes sense as we have seen consistent reductions in inventories. 

This sort of "perfect storm" of fundamentals has crude soaring higher currently with a high today of just more than $48. That equates to an over $10 move higher in the past four sessions, over 25% higher.  The same over exuberance that pressed the market lower into an oversold condition, is most likely having the same effect to the high side as market participants flood in to either speculate on higher prices or hedge its crude oil needs from a consumption perspective. 

Natural gas is off the radar for the moment as there appears to be very little interest in the commodity from an either bullish or bearish stance.  At these levels, it would seem more likely that the breakout, if/when it finally comes, would be to the top side.  With such little volatility, selling premium can be attractive though with premiums so low, there is not much of a reward for the potential risk.  With the low premiums, however, there are some solid risk reward opportunities from a long premium perspective though it has been a losing proposition for the past two to three months. 

About the Author

Tory Enerson is a senior market strategist with the Zaner Group in Chicago, an Independent Introducing Broker. He has been in the futures industry for over 20 years. Beginning his career at the CBOT in 1990, Enerson worked his way up through the industry when he became a member of the CBOT in 1998 and traded for over a decade before beginning to work with clients as a market strategist.