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Strategies & Market Trends : John Pitera's Market Laboratory
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To: Pogeu Mahone who wrote (18105)4/11/2016 10:41:59 AM
From: John Pitera1 Recommendation

Recommended By
Pogeu Mahone

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We are all still just oil traders
.
Robert SavageCEO at CCTrack Solutions, LLC

(Robert was at FX concepts the worlds Largest FX focused hedged fund run by John Tayor...JJP)

If you played the tape backwards in 1Q 2016 you would hear how we are all still just trading oil. In order to figure out the best trade you really have to figure out the only trade that matters. The correlation of oil to everything was profound. If you wanted to know the price of the USD/EUR just tell me where oil was trading. Same for S&P500 or bonds or gold or emerging markets - just about everything saw a spike up to its relationship to oil prices.

The effect of the oil shift down from $80-$110 stability post 2008 to the new range of $25-$40 has been decidedly unpleasant. The price action from February 11 with the bounce from $26 WTI and the hope of a double bottom opening up $45-$50 retests remains the ongoing story into the April 17th OPEC/Non-OPEC meeting. There is some reason to doubt that a bigger bounce back occurs quickly

- that is the central worry - that we see oil remain low for longer and that this trade doesn't yet fully reflect in all other asset classes. It implies, for example, a lower inflation price in Europe - opening up the ECB to being zero or negative for years. It leaves the energy exporters vulnerable to borrowing and makes their hoard of savings look too small - opening up further doubts about risk capital.
Central to seeing oil prices stabilize is the balancing act of demand against supply. The Contango narrowed sharply with the price recovery from $25 to $40 WTI. This suggests that moves to $45-$50 will be overshoots until we see real production reductions. That leaves the output results from OPEC and non-OPEC as central. The chart that troubles everyone remains that of production - as the price drop hasn't yet led to the fast and furious retreat in the US and elsewhere as expected. Until markets see bankruptcies leading to production reduction, until Saudi money buys US Shale production and shuts it down, until EM producers like Venezuela and Nigeria retreat and close production, then there won't be much hope for $60 bbl.

So figuring out how to trade 2Q remains like 1Q - a story about global demand and real economics. The oil price as a barometer of everything continues to be central to trading if not investing in 2016. The fear for 2Q would be further consolidation with oil stuck at $35 bbl and Gold at $1300 - implying stagnation globally. Markets won't like that and the implications are rough for 2Q outcomes.
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