Thursday, April 3, 2014

The Incredibly Boring Crude Oil Market

by Attain Capital

Remember the good old days when Crude was at $150, Saudi Princes were having Audis made out of Silver, and trader’s were storing oil on tankers to turn a profit…. Everyone had an opinion on where Oil prices were headed, with crazies throwing out $1,000 Oil and others saying there’s $75 of risk premium built into the price. Those were the good old days when Crude Oil stories read like the tabloids…

But fast forward a few years and Crude Oil has become…dare we say… boring.  Just take a look a the incredible shrinking range of Crude over the past 3.5 years to see what we mean.

Crude Weekly

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

Crude had over a $100 point range in 2008, a $60 range in 2009, and about $40 in 2011. But since then it’s been smaller and smaller daily, weekly, and annual ranges for the poster child of commodities.  Just look at last year, where despite tensions tension’s in the Middle East last summer and a train holding thousands of gallons of oil derailing, the volatility in crude oil decreased by -18% {past performance is not necessarily indicative of future results}.

But here’s the thing, contracting volatility and decreasing ranges can be compared to a spring being coiled up (compressed), with only one way out – a fast, swift decompression. Is Crude Oil about to stop compressing and spring back into activity? Nobody knows for sure, but the chart is doing a little thing the technical analysis folks like to call a “pennant” chart pattern.

See how the triangle sort of looks like a baseball pennant (not that us Cubs fans in Chicago know much about what a pennant looks like outside of the one’s on the Wrigley scoreboard).

The “pennant” chart pattern is a triangle shaped pattern where prices continue to fit into the smaller and smaller range between the converging sides of the pennant, until…. they breakout to one side or the other. Now, those with more of a background in this sort of thing can debate where the flagpost is, whether this is a bull or bear pennant, and the rest. But for most trend followers, they don’t really care which way Crude Oil breaks from this pennant range – they just want it to break.  Some pennant formations can last days, and others can last multiple years (such as this one). But inevitably, as the range of the market continues to be constrained, a new breakout from that range will occur.

Here’s hoping…

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