Oil Price Crash: FACTS

We are now experiencing something that has NEVER HAPPENED BEFORE. The prices of Oil are falling into negative numbers and the energy market is panicking.

Is this an opportunity of a lifetime or a mad gamble?

Here are some facts that may help you make your mind about that.

FACT #1: What caused this?

There are two factors that caused the crazy price drop.

The first factor is Russia and Arabia who simply flooded the market by their excess supply of Oil. Under normal circumstances, this would be bad, but what really made this a catastrophe is the timing which came along with the current COVID-19 pandemic.

The demand for Oil has plummeted because most of the world is now in a lockdown, and the economy is massively slowed down.

Simply put: Too much oil and nobody wants it.

 

FACT #2: Oil storages are nearly full

If there was a place where to put all the excessive and cheap oil, then it wouldn’t be such a huge problem. But unfortunately, the biggest Oil storages (both private and non-private) are almost full.

There are some storage containers still empty (mostly those under maintenance) but there are not many of them and even if they got filled it would not help too much.

FACT #3: Oil prices CAN be negative

When there is no place to store the oil, then the only option is to pay somebody to take it (unless you want it delivered into your backyard). This is a crazy thing, but it happens right now! Oil with March delivery went into a crazy sell-off and it ended up in negative numbers!

I personally thought I would never see such a thing, but here we are and this is happening right now!

FACT #4: Negative Oil prices were mostly caused by futures rollover

This plunge of Oil price was most likely caused by the futures contracts rollover. Everybody wanted to get rid of their Oil before the rollover and this caused the free fall and the negative prices.

If there was not a rollover I don’t think we would see Oil prices in negative numbers

FACT #5: Cuts in Oil production

An agreement has been made that the OPEC will cut the production of Oil. This should help the Oil prices to recover.

The production will be cut by nearly 10 million barrels/day. This is the biggest single cut in history.

This cut will take place from 1st May 2020 and it will be active until the end of June 2020.

FACT #6: The 10 mil. cut is not enough

The cut in Oil production was agreed upon in order to help the Oil companies and save them from bankruptcy.

Even though this cut is huge, it needs to be bigger in order to save most of the Oil companies. It would need to be around 20-30 mil cut instead of “just” a 10 million cut.

FACT #7: Oil companies will bankrupt

It is said that around 40% of the Oil and Natural Gas companies will go bankrupt within a year if the price does not rise at least above $30/barrel.

Or if they won’t get saved or bought by somebody else.

FACT #8: Big Oil companies will be taking over the small ones

Right now, it seems inevitable that some Oil companies will go bankrupt. The first ones to go are the ones with big debts.

What can be expected is that the biggest companies in the industry (like Chevron or Exxon) will want to take this opportunity and buy their smaller competitors cheap. 

This way they will grow even bigger and they will get rid of their competition. They only need to have the cash to do the acquisition.

FACT #9: Donald Trump is trying to save the Energy sector

Those are the steps the US president took to rise the Oil prices and to help the energy sector (or at least the main steps which I noted):

1. He managed to make the deal to cut the Oil production by 9.7 mil barrels/day.

2. He publicly announced that the US will be filling up their Oil reserves. He announced this twice (I think) and neither announcement helped the Oil to recover.

3. He said he would work on a plan to save the US Energy sector (companies). He announced this just a few moments ago so let’s wait and see what this plan will be.

?FACT #10: Plunge Protection Team in play?

This is not really a fact but my own hypothesis. I think the Plunge Protection Team is in play.

What do they do? They simply wait until the market is under some crazy pressure and panic, and then they start to pump money into it to save it from a total collapse.

I think this happened today (April 21st 2020) when the Oil was in a free fall. Then the price froze for about 5-10 minutes and then the price shot upwards from $5.69 to $11. That’s 100% gain in just a few minutes! Crazy right?

I think it is pretty likely that it was the Plunge Protection Team joining the game here.

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UPDATES

I will update this article if some new important facts about the Oil show up. If you have any (or if you have any corrections to my facts) please shoot me an email and I will update the article.

Stay safe and happy trading,

-Dale

Oil Price Can’t Drop to $0. How To Profit On That?

What is the difference between trading a currency pair (forex) and trading a commodity like Oil? It is quite simple: the Oil price cannot fall to zero, whereas a currency actually can devaluate so much it becomes almost worthless. A typical example is a hyperinflation in Venezuela. This picture shows how bad it was:

This sort of thing has already happened in many countries in the world, not just in Venezuela. The reason was that the central banks were printing too much money. This is extreme, but it can happen…

How deep can a commodity drop?

Can this happen with Oil or any other standard commodity? The answer is not black and white. It depends on how important the commodity is. I don’t think such devaluation can happen to Oil because it is an essential commodity which we need in almost every industry.

Can this happen to Gold? In my opinion much more likely! The reason is that gold does not have that much use. Only around 5-10% of it is actually used for something else than investment, coins and jewelry…

Why am I talking about this? Because I think there is now a good opportunity for an Oil investment. The reason is simple – it is cheap. Saudi Arabia and coronavirus crisis made this happen.

How deep can the Oil prices drop?

The price dropped from $60 to $20 just in three months. How deep can it fall? I don’t know but I know that it can’t go below zero 🙂 So, for me the strategy is simple – the lower it goes, the more I buy. I must warn you though. You need to have a big enough account to do this! But if you do, then it is a pretty viable strategy to follow on the Oil.

The trade entry is just a part of the story. We need a complete plan, right? We need to set a place where to quit the longs.

Take Profit for a Long trade

In my opinion, it is best to quit a trade just before it reaches a strong resistance. Why? Because a resistance could potentially endanger your trade and turn the price downwards again.

So, let’s look for a strong resistance on the Oil, shall we?

What I find ideal in such a long-term investment analysis is to use higher time frames. In this case I used the Daily chart.

I used my Flexible Volume Profile to look into the crazy trend area which started at the beginning of this year. The most important thing it showed was a significant volume cluster around 51.00. This is where I think a lot of the sellers added to their short positions.

When the price makes it back to this area it is pretty likely that those sellers will try to push the price down again because they will try to defend their short positions.

Support → Resistance setup

Apart from the volume cluster, there is also another confirmation of this resistance level. As you can see from the picture above, there were three really strong rejections of this level in the past. The price bounced off this level upwards and because of this I think it was a strong support.

When this support got breached in January 2020, it then became a resistance. It is a simple Price Action strategy and you can learn more about it here:

Price Action Strategy: Support Becoming Resistance

For those two reasons (volume cluster and S→R setup) I think the 51.00 is an ideal place to quit the long. Actually, the safest place would be little bit below 51.00 in case the price decided to turn a bit sooner (this happens sometimes). It may also not be a bad idea to immediately enter a short, but now it is probably too soon to think about this.

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The cost of going Long

Trading such long-term positions can take up weeks or months. For this reason, it is important to know your costs for holding your trade overnight. You should be able to find the costs somewhere in your trading platform. What you should look for is a “symbol info”. It is a table that can look for example like this:

In this case, you want to know the Swap Long. It tells you how much it is going to cost you every day. Good news is that it costs five times less for a Long position than you would pay for a Short.

You have all it takes to trade this?

If you guys want to follow this strategy please consider if you have the guts for it and also if you have big account for it. Your account needs to withstand a big price drop and you should still be okay to hold the trade and even add to it! You need to be prepared for this!

Also, this is just my trading idea not any sort of recommendation. What you do with this idea is only up to you. You are trading with your money and it is you who is responsible for it.

Yesterday’s trade on CAD/JPY

Did you read my CAD/JPY analysis yesterday? If no then you can read it here:

CAD/JPY: Volume Profile Analysis

Here is a picture from yesterday (PREDICTION) and below that it is the RESULT of the prediction.

I hope you liked today’s article guys. Let me know what you think in the comments below!

Stay safe and happy trading!

-Dale

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BUY OIL (if you have the GUTS for it) – Weekly Trading Ideas 9.3.2020

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Oil: Volume Profile Analysis

Today I would like to have a closer look with you at Oil. There are some pretty strong volume-based resistances and also one support. All these are nicely visible from higher time frames like 4 Hour or Daily.

If you look at the current price development, you can see that the Oil is currently in a downtrend.

When there is a significant downtrend I always look for heavy volume clusters that got created within the downtrend.

I used my Flexible Volume Profile indicator to look into the recent downtrend and I discovered that the most significant volume clusters were around 51.20 and 58.10. What do these Volume Clusters tell us?

They tell us that sellers who are currently pushing the price downwards were adding to their selling positions there (at these volume clusters).

How is that important now? This is important to know because when the price makes it back into these Volume Cluster areas again, those sellers will most likely become active again and they start aggressively pushing the price downwards again.

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Support→Resistance

There is a nice confluence on the 51.20 resistance which I would like to point out. This confluence is best visible on higher time frame, for example on Daily chart.

If you look at the picture below you can see that the price bounced strongly off the 51.20 area. I marked it in blue. This tells me that this area was a strong support.

When a strong support gets breached it then becomes a resistance. This is what happened recently. The support got breached and now the price is way below it. This support (51.20) became a resistance.

As you can see all this happened at the volume-based level I found using Volume Profile. That’s what I call a nice confluence of trading signals!

Now we have volume-based resistance and at the same time this is also a breached support which became a resistance.

Heavy Volume Cluster from 2018

Another thing worth noticing on the Oil right now is how the price reacts to the heavy Volume Cluster which got formed in 2018.

I have already pointed this level out in the past in one of my Weekly Trading Ideas videos. Now the price finally hit this area and reacted to it. In my opinion, this buying reaction is not over yet and we may see some more aggressive buying activity that will help to push the price up – towards our volume-based resistance.

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Current development of levels mentioned in previous articles

Here you can have a look at how the price reacted to some of the trading levels I published a few days ago in the Market Analysis articles.

S&P 500 prediction

Here is S&P 500 support I talked about in this article:

Where Will The S&P 500 Sell-off Stop?

Here is the result:

Gold prediction

Below is a reaction to a resistance on Gold I wrote about in this article:

A MAJOR Resistance on GOLD

Prediction:

Result:

I hope you guys like this article and my trading analysis. Let me know what you think in the comments below!

Happy trading!

-Dale