WTI Weekly: Price Discovery Lower Continued Early Week To 57.36s Where Buy Excess Halted The Sell-Side Auction

Summary

• Price discovery lower continued in Monday’s auction amidst the developing February-March contract roll to 57.38s (March Contract) into mid-week.
• Structural buy excess developed there before price discovery higher ensued to 59s into the week’s end.
• This week’s leveraged capital posture reflects declining net long posture.
• This week’s auction saw sell-side continuation toward December’s key demand cluster following the recent US-Iran conflict.

In this article, we examine the significant weekly order flow and market structure developments driving WTI price action.

As noted in last week’s WTI Weekly, the primary expectation for this week was for price discovery lower, barring failure of 62.22s as resistance. This expectation did play out as price discovery lower developed to 57.36s into Wednesday’s trade amidst the February-March contract liquidity roll. Buy excess developed there, halting the sell-side sequence as price discovery higher ensued to 59s ahead of Friday close, settling at 58.58s.

12-17 January 2020

This week’s auction saw price discovery lower to 58s in Monday’s auction as last week’s key support failed. Minor price discovery lower developed in Tuesday’s trade, achieving a stopping point, 57.74s, where minor buy excess developed as buying interest emerged, 58s, in Tuesday’s London auction, halting the sell-side sequence. Balance developed, 57.80s-58.74s, through the remainder of Tuesday’s trade into early Wednesday’s auction.

Narrow balance continued in early Wednesday’s trade before a sell-side breakdown attempt developed, achieving the weekly stopping point low, 57.38s, through the EIA release (-2.5mil vs. -470k expected). Buy excess developed there, halting the sell-side sequence. Price discovery higher developed to 58.44s early in Thursday’s trade before minor sell excess developed, driving price lower in retracement to 57.59s, re-testing the weekly low. Buy excess developed there before price discovery higher resumed, achieving the weekly stopping point high, 59s, ahead of Friday’s close, settling at 58.58s.

This week’s primary expectation was for price discovery lower barring failure of 62.22s as resistance. This probability path did play out as sell-side continuation developed to 57.37s amidst the February-March contract liquidity roll. Buy excess emerged there, halting the sell-side sequence before price discovery higher ensued to 59s into the week’s end. This week’s rotation (191 ticks) traded below the average weekly range expectancy (389 ticks).

Looking ahead, response to the key cluster, 59s-58.40s, will be key within the context of the development of a potential stopping point low, 57.36s, following an approximately 13% correction from the Iran conflict high. Sell-side failure to drive price lower from this key resistance will target key supply clusters overhead, 60.65s-61.50s/62.12s-63.65s, respectively. Alternatively, buy-side failure to drive price higher from this key cluster will target key demand clusters below, 56.85s-55.30s/53.75s-52.85s, respectively. Near-term bias shifts buy-side, barring failure of 57.59s as support. The broader contextual question is what the next directional phase will bring following the current developing balance, 65.65s-50.52s.

It is worth noting that market posture warranted caution on the buy-side near the April 2019 high, 66.60s, as Managed Money (MM) long posture peaked there. MM short posture then trended higher before reaching the near-term peak into late July where the current price low was formed. Similarly, in recent weeks, market posture reached similar levels to April 2019 as price traded toward 64s. This week’s report shows MM net long posture (+225k contracts), a decline in tandem with the approximately 13% price decline from the Iran narrative high, 65.65s. MM long:short ratio, MM net long as % of open interest, and MM net long posture are all closer to levels seen at recent resistance areas. This development continues as WTI now trades into the beginning of the typically bullish season (January-May). This divergence implies a broader neutral posture as the buy-side once again failed near major structural resistance, 64s.

The market structure, order flow, and leveraged capital posture provide the empirical evidence needed to observe where asymmetric opportunity resides.

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.