TradeThink predicts trends for futures and commodities markets

Complimentary Access to Alaron ETC

These days, it seems there are as many trading systems as there are traders. Each has strengths and weaknesses, and what works for one trader may be unsuitable for another. That's why we created Alaron ETC (Electronic Trading Center), a unique service catering to your individual trading needs. You have questions, Alaron ETC has answers. Learn More Here!

Short-term market volatility frequently accompanies the release of the EIA summary of weekly petroleum data. The report, which is released electronically on the EIA web site, is available for viewing at 9:30 central time each Wednesday. The often-quoted headline is made by the change in US commercial crude oil inventories. The market response to the release can be erratic.

In general a large build in the inventory is perceived as bearish for price while cuts are bullish. Sometimes though as was the case this week; crude inventories showed a build of .7 million barrels but then rallied higher after making a small move to the downside on the number.

Changes to the commercial inventory can have implications for perceived growth or inflation. Better stability can be achieved through studying the price relationships between various energy products and understanding how these relationships behave in response to changes not only inventories but also in imports; refinery utilization; and in the levels of the derivative gas and distillates.

But before we get into the spread relationships we can first use the EIA report to help us gain context on the current market situation. We know that crude inventories are well above their average range for this time of year. And that demand for crude imports though up 93 thousand barrels over the past week are still off roughly 674 thousand barrels a day year over year. This coupled with weak refinery utilization at 82.7 percent of capacity and Chinese imports showing a recent 18 percent month over month drop spells out a fundamentally bearish outlook for crude oil prices.

Despite the soft numbers the bulls are not without some potential fodder for a rebuttal. With an OPEC meeting scheduled for Sunday in Vienna and sentiment mixed on the possibility of further cuts from the oil cartel and the expiration of the April Nymex crude contract six days away traders will not be eager to hold short positions over the weekend.

Given this set up it seems that fading the rallies is the play for the foreseeable future. But a deeper reading of the EIA report also presents us the opportunity to take advantage of the changing relationship between correlated products in the energy complex.

For starters we should consider the gas crack. After widening out to almost $20 it was showing weakness ahead of Wednesday's inventory report trading as low as $7.50. With crude stocks as we already know above their upper range for this time of year and the gas down 3.0 million barrels a long play on the gas crack paid off nicely rising to over $10.00 by Wednesday's close. It has since drifted back down and may present another opportunity for upside action if next weeks numbers look anything like the previous.

We can also consider the calendar spreads. The Brent crude has made a swift turn this week opening at a $2.00 premium to WTI but currently trading around a $2.00 discount. In the same period of time we have seen the quarterly contango for Nymex WTI contract sharply. This market movement is no coincidence. This relationship along with our import data can present high probability entries in the one month and quarterly spreads. Until the Brent shows strength again against the WTI we will continue to look for opportunities to buy the crude spreads at the front part of the forward curve.

The EIA report is clearly more than just the headline number. There are numerous ways to trade with the data and you have seen just a couple outlined here. Trading plans can be custom tailored to an individuals account size and risk profile. Clearly though the opportunity for reward exists for traders who go beyond the headlines and really dig into the available market data furnished by the EIA.

If you are interested in learning more about trading futures, sign up for complimentary access to Alaron ETC (Electronic Trading Center).

Erik Voit has lived at the forefront of technology since writing his first applications on his Deskpro 386 in the late 80's. Though he has formal training as a network engineer he attributes much of his skill set to his time spent as a technical analyst with the Bank of New York. After leaving BNY, Erik became involved with a proprietary derivatives trading firm in Chicago's financial district. Erik is currently the Senior Trading Technology Advisor for Alaron Trading in Chicago. He provides regular webinars, workshops and consultation on all trading and technology matters; from the most basic to the most advanced.

Complimentary Access to Alaron ETC

These days, it seems there are as many trading systems as there are traders. Each has strengths and weaknesses, and what works for one trader may be unsuitable for another. That's why we created Alaron ETC (Electronic Trading Center), a unique service catering to your individual trading needs. You have questions, Alaron ETC has answers. Learn More Here!