Will a Jumbo Rate Cut Fuel Crude Oil Rally?
US equities soared to record highs on higher-than-expected rate cuts by the US Federal Reserve. Additional rate cuts implied by the Fed dot plot signals a goldilocks economic scenario. A booming economy coupled with low crude oil inventory levels with intensifying geopolitics could tip crude oil prices into a rally.
Oil prices rose higher yesterday as hard economic landing concerns eased. Despite the rise, oil prices still languish at near-record lows for the year.
This paper posits a long position in CME Micro WTI Crude Oil Futures with an entry at 69.90/barrel with a target of 76.50/barrel and a stop at 67.30/barrel.
JUMBO RATE CUT BY THE US FEDERAL RESERVE
The Federal Reserve cut interest rates by 50 basis points (bps), bringing the federal funds rate to 4.75%-5%. With inflation easing and the labour market softening, the Federal Open Market Committee (FOMC) opted for the aggressive rate cut.
US inflation is nearing its 2% target. Job growth has slowed. Unemployment, though rising slightly, remains low. To maximise employment while guiding inflation on a downward trajectory, the FOMC delivered a 50 bps rate cut.
The unemployment forecasts were revised to 4.4%, up from June's 4% estimate. Inflation outlook was lowered to 2.3% from 2.6%.
NOT ONE BUT THREE OIL BULLS ARE LURKING IN THE SIDELINES
Rate cuts, low inventory, and intensifying geopolitical tensions could tip oil prices into a rally.
Rate Cuts and Crude Oil
Typically rate cuts boost oil prices by weakening the dollar and increasing demand for dollar-denominated commodities.
Tank-Bottom Inventory Levels
US commercial crude oil inventories have fallen to their lowest level in a year. Inventories at Cushing have hit tank-bottom levels. For now, a larger-than-expected drop in US crude inventories for the week ending 13/Sep had a negligible impact on oil prices.
The EIA reported a 1.6 million barrel decline, surpassing analysts' expectations of a 200,000 barrel drop.
Traders dismissed the drop in inventory, attributing it to temporary facility shutdowns on the US Gulf Coast due to inclement weather.
US refineries plan to undertake their lightest preventive maintenance season in three years as estimated by IIR Energy. Higher refining activity should result in increased demand for crude oil in the coming months.
Intensifying Geopolitics
Talks between Libya's rival factions have collapsed leading to a significant decline in Libyan exports. Compounding that are the escalating Middle East conflicts with pagers and walkie-talkies explosions in Lebanon.
OIL BULLS FACE FEEBLE MACROECONOMIC CONDITIONS IN CHINA
Earlier this month, OPEC, EIA, and IEA lowered their 2024 global oil demand forecasts, citing weaker demand from China's slowing economy.
Recent data shows continued weakness. Industrial output growth is at a five-month low. Oil imports are declining with slower refinery output. Property prices continue to fall. Retail sales growth remains tepid.
Housing prices continued to decline, with a 5.3% YoY drop, the steepest since 2015. New home prices fell 0.73% MoM in August, a sharper decline than July's 0.65% drop.
Property investment dropped 10.2% YTD, while housing completions fell 23.6%, indicating that declining property prices are deterring investment.
HYPOTHETICAL TRADE SETUP
When oil bulls lurking in the dark attack, expect oil prices to spike. Options markets are positioning for this scenario. Open Interest Put/Call Ratio at 0.77 as of 18/Sep in CME WTI Crude Oil points to a bullish slant.
CME Micro WTI Crude Oil Futures offer the same exposure to crude oil price movements as standard WTI futures, but at 1/10th the contract size, making them a more accessible and flexible option for traders, enabling more granular hedging.
This paper posits a long position in CME Micro WTI Crude Oil Futures with the following trade setup:
• Entry: 69.90/barrel
• Target: 76.50/barrel
• Stop: 67.30/barrel
• P&L at Target (per lot): $660 ((76.50 – 69.90) x 100)
• P&L at Stop (per lot): $ 260 ((67.30 – 69.90) x 100)
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Oil prices rose higher yesterday as hard economic landing concerns eased. Despite the rise, oil prices still languish at near-record lows for the year.
This paper posits a long position in CME Micro WTI Crude Oil Futures with an entry at 69.90/barrel with a target of 76.50/barrel and a stop at 67.30/barrel.
JUMBO RATE CUT BY THE US FEDERAL RESERVE
The Federal Reserve cut interest rates by 50 basis points (bps), bringing the federal funds rate to 4.75%-5%. With inflation easing and the labour market softening, the Federal Open Market Committee (FOMC) opted for the aggressive rate cut.
US inflation is nearing its 2% target. Job growth has slowed. Unemployment, though rising slightly, remains low. To maximise employment while guiding inflation on a downward trajectory, the FOMC delivered a 50 bps rate cut.
The unemployment forecasts were revised to 4.4%, up from June's 4% estimate. Inflation outlook was lowered to 2.3% from 2.6%.
NOT ONE BUT THREE OIL BULLS ARE LURKING IN THE SIDELINES
Rate cuts, low inventory, and intensifying geopolitical tensions could tip oil prices into a rally.
Rate Cuts and Crude Oil
Typically rate cuts boost oil prices by weakening the dollar and increasing demand for dollar-denominated commodities.
Tank-Bottom Inventory Levels
US commercial crude oil inventories have fallen to their lowest level in a year. Inventories at Cushing have hit tank-bottom levels. For now, a larger-than-expected drop in US crude inventories for the week ending 13/Sep had a negligible impact on oil prices.
The EIA reported a 1.6 million barrel decline, surpassing analysts' expectations of a 200,000 barrel drop.
Traders dismissed the drop in inventory, attributing it to temporary facility shutdowns on the US Gulf Coast due to inclement weather.
US refineries plan to undertake their lightest preventive maintenance season in three years as estimated by IIR Energy. Higher refining activity should result in increased demand for crude oil in the coming months.
Intensifying Geopolitics
Talks between Libya's rival factions have collapsed leading to a significant decline in Libyan exports. Compounding that are the escalating Middle East conflicts with pagers and walkie-talkies explosions in Lebanon.
OIL BULLS FACE FEEBLE MACROECONOMIC CONDITIONS IN CHINA
Earlier this month, OPEC, EIA, and IEA lowered their 2024 global oil demand forecasts, citing weaker demand from China's slowing economy.
Recent data shows continued weakness. Industrial output growth is at a five-month low. Oil imports are declining with slower refinery output. Property prices continue to fall. Retail sales growth remains tepid.
Housing prices continued to decline, with a 5.3% YoY drop, the steepest since 2015. New home prices fell 0.73% MoM in August, a sharper decline than July's 0.65% drop.
Property investment dropped 10.2% YTD, while housing completions fell 23.6%, indicating that declining property prices are deterring investment.
HYPOTHETICAL TRADE SETUP
When oil bulls lurking in the dark attack, expect oil prices to spike. Options markets are positioning for this scenario. Open Interest Put/Call Ratio at 0.77 as of 18/Sep in CME WTI Crude Oil points to a bullish slant.
CME Micro WTI Crude Oil Futures offer the same exposure to crude oil price movements as standard WTI futures, but at 1/10th the contract size, making them a more accessible and flexible option for traders, enabling more granular hedging.
This paper posits a long position in CME Micro WTI Crude Oil Futures with the following trade setup:
• Entry: 69.90/barrel
• Target: 76.50/barrel
• Stop: 67.30/barrel
• P&L at Target (per lot): $660 ((76.50 – 69.90) x 100)
• P&L at Stop (per lot): $ 260 ((67.30 – 69.90) x 100)
MARKET DATA
CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
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