Playing Discretionary Global Macro Trader For a Day

Since this down move started, the first question we get when talking to investors is: “When is crude going to find a bottom in the market?” For that, we’ll refer you to “How to Play a Bounce in Crude Oil (Hint: Not $USO).” Let’s face it, if you’re asking that question, then you want to play global macro discretionary trader for a day. Ignoring the metrics, the Bollinger Bands, the Average True Ranges — what are events telling us? Let’s pretend we’re a discretionary trader…

Before we know where we’re going, we need to know where we’ve been:

We’ll be the first to tell you past performance is not necessarily indicative of future results, but how much has crude moved lower relative to other big down moves? We haven’t seen crude oil below $40 since 2009. But it’s not just the fact that it’s near $40, it’s that it’s in the top 5 down moves of all time.

Worst Crude Declines in History:’85-’86: -63%’90-’91: -51%’96-’98: -53%’08-’09: -68%’14-Today: -59%

— Charlie Bilello, CMT (@MktOutperform) Aug. 12 at 10:26 AM

 

What’s been the impact of the drop?

If you have stock in Exxon or Chevron, things don’t look too optimistic, but for the average consumer, you actually have more spending power than you had last year without really knowing it. Since the oil’s drop, America’s 10 largest oil companies have lost a combined $200 billion in market cap, the Texas oil industry lost 8,300 jobs, and a handful of well publicized “commodity funds” have stopped trading or seen big losses (Andy Hall, Armajaro, etc). On the flip side, the energy department predicts this sort of drop will give U.S. consumers a combined $60 billion more spending power.

How does supply and demand work?

Well, given that our world increasingly runs on energy (from driving to manufacturing to charging iPhones) , and crude oil is responsible for at least 1/3rd of all energy used around the world, understanding the demand is rather intuitive. But OPEC, Shale, Brent, WTI, and the rest confuse the supply side somewhat. CNN Money provides a good explanation of how the global economic supply and demand chain works with crude oil in this video.

What’s with the recent down move?

Nobody knows for sure – the easiest answer is that investors and consumers want to pay less for it today than they did a few weeks ago. More complex answers involve China, the Saudis, improvements in technology, and all the rest. Here are some of the stats and fundamentals we have to digest as a discretionary guy.

U.S. Dollar Strength

Remember that commodities like Gold, Corn, Cotton,  and Oil are all priced in US Dollars – so all else being equal – a rising US Dollar means a falling commodity priced in US Dollars.  That made perfect sense last year as we saw the US Dollar up and Oil down. It’s played out a little less so in 2015, with the USD having mainly been range bound.

USD(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz

OPEC 3-year-highs Production

OPEC isn’t slowing down production, despite the plunge in price (or maybe they’re doing so on purpose to curse the Shale guys as some conspiracy theorist would have us believe). Just this week, they reported OPEC is at three year production highs. Here’s a table of the OPEC countries and their oil production month to month, via Bloomberg.

OPEC oil productions

China Economic Slow Down

China is certainly dealing with a slowing economy with their markets tumbling, China’s central bank devaluing the Yuan, and China cutting their import of crude oil by 11% since last year. When one of the largest importers of oil cuts their import supply by 11% from a year prior, that’s something to pay attention to.

A Global Take

Speaking of which…oil plays a big role with global economics, not only because countries need it for energy, but also because its people do as well. Here’s a stellar interactive map looking at what percentage of GDP is reliant on crude oil imports or exports, via the Economist.

The Economist Map Crude OilChart Courtesy: The Economist 

As a case study, the crude oil drop has really hit Ecuador’s economy hard, and that’s just one of the many countries whose economic stability is tied to the market.

Where will it go from here?

Will OPEC continue to increase oil production, price be damned? Will more oil rigs come online in the U.S. in anticipation of increased US economic activity? Will the lifting of Iranian sanctions increase production even more? On the flip side, if China cuts imports more, how low could oil go?

The real question for those looking to dig deep into the supply and demand of crude oil is: “What is the lowest it can go?” After all, it can’t go to zero, there will be some economic use for it, thereby giving it a value. But let’s be real, very few investors have the time to research the most recent happenings in the crude market, and by the time it’s being published online, the market has already reacted.  And that’s just the energy market stuff.  Don’t forget how ingrained with the US and world economy Crude is, meaning you’ll have to play world economist as well.

For our money, we’d much rather take emotions (and the hours and hours of work) out of it and rely on professionals approaching the market in a disciplined and systematic way; whether they are the trend following type, which won’t look to play a bounce until and unless the market breaks above recent highs and/or moves above moving averages, or professional commodity traders relying on fundamental data, but doing so in a systematic way where only so much is risked in case the market doesn’t react in the way they expect from the fundamentals.

 

 

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.