In this article, we examine the significant weekly order flow and market structure developments driving WTI price action.
30 September- 05 October 2018:
As noted in last week’s WTI Weekly, given last week’s buy-side breakout and lack of sell excess, the likeliest near-term probability path was to the buy-side as major supply continued to be tested. This inference played out as buying interest entered early week, driving price higher in buy-side continuation to 76.90s where selling interest emerged, halting the buy-side auction, driving price lower in pullback, closing the week at 74.34s.
This week’s auction saw price discovery higher early week as initiative buying interest emerged, 73.66s-74.04s, during Monday’s auction. Price discovery higher developed into early Tuesday, achieving a stopping point, 75.92s. Low volume selling interest emerged as a minor sell excess developed, 75.92s-75.62s. Balance development ensued, 74.92s-75.57s, into Wednesday’s auction as the market awaited the EIA data release. The market saw a liquidation break upon the EIA release (+7.9 mil v +1.9 mil expected), driving price lower to 74.30s. Buying interest emerged there, rejecting the low and forming a buy excess, 74.30s-74.80s. The aggressive sell-side auction and subsequent buy-side rejection is a structural phenomenon that indicates the buy-side auction is not over, merely requiring a shake-out of weak long inventory to trade higher. Subsequently, the market traded back into the sell excess. Initiative buying entered, 76s-76.15s, driving price higher into Wednesday’s NY close, achieving the stopping point high, 76.90s.
Selling interest emerged at the high, driving price lower, forming a sell excess, 76.90s-76.48s, into Thursday’s auction signaling a potential stopping point high was in place. Selling interest emerged at 76s, driving price lower in a sell-side auction. Price discovery lower developed to 73.87s into Thursday’s NY close where low volume buying interest emerged as a minor buy excess developed, 73.88s-74.14s. This structural development indicated that the sell-side auction had been halted. Two-sided trade developed into Friday’s auction as the stopping point low, 73.87s, was tested and rejected. The market traded higher as a false buy-side breakout developed to 75.22s. Selling interest emerged there, rejecting the high as a sell excess developed, 75.22s-74.90s, ahead of Friday’s NY close, settling at 74.34s.
As noted last week, market response to last week’s supply, 73.10s-73.50s, was key. The sell-side failure there amidst initiative buying early week provided a structural “tell” that price discovery higher was likely. The first weekly inference played out as the market traded toward Sharedata’s average weekly range high target where selling interest halted the buy-side auction.
Looking ahead, this week’s auction saw a sell excess develop, 76.90s-76.46s, halting the buy-side auction. Additionally, the pullback late in this week’s auction saw a second sell excess develop in Friday’s auction, 75.22s-74.90s. It is worth noting that while price traded above prior major supply, 74.90s-75.25s, sell-side rejection developed amidst buy-side failure to accept higher prices. The development of a structural stopping point high following a buy-side imbalance phase implies potential for balance near-term.
It is worth noting that based on the Commitment of Traders report, Open Interest (OI) remained largely unchanged as the deleveraging within the WTI market continues. Additionally, the Managed Money (MM) net long position which peaked in January 2018 at 495k contracts has currently declined to 319k contracts. MM short posture increased (-31k contracts) near multi-year lows. Importantly, the MM short posture trend remains key. Without increasing MM long posture and substantially higher MM short posture, it will be difficult for the market to trade beyond the key supply overhead, 76s-77s. Additionally, given the typical seasonal price weakness of WTI, asymmetry in risk would remain to the downside based on the market generated data. The response to the developing supply overhead, 76s-77s, in coming days and weeks is key for WTI in the larger context.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.