Q&A
Inside The Futures World
Want to find out how the futures markets really work? DeCarley Trading senior
analyst and broker Carley Garner responds to your questions about today’s
futures markets. To submit a question, post your question at https://Message-Boards.Traders.com.
Answers will be posted there, and selected questions will appear in a future
issue of S&C. Visit Garner at www.DeCarleyTrading.com.
Her books Currency Trading In The Forex And Futures
Markets; Commodity Options; and A Trader’s
First Book On Commodities, are available from FT
Press.
A “CRUDE” LOOK BACK AT OIL FUTURES
I know it’s a little early, but I’d like to congratulate Technical Analysis of Stocks & Commodities for its 30th anniversary! Without a doubt, successfully operating a print publication for this span of time has taken hard work, dedication, and the ability to adapt to various business and economic environments.
In honor of the occasion, we thought it would be fun to take a look at how the crude oil market has evolved over the previous three decades. In this month’s column, we’ll focus on price changes and tendencies; after all, before we can attempt to predict where prices might go, we must understand where they have been. Stay tuned for the October issue in which we will discuss the logistics of trading, technology and, most important, what we know about these topics to improve your odds of trading success.
When S&C was opening its doors for business in the autumn of 1982, the price of a barrel of crude oil was about $32. Although this sounds cheap to us now, this was considered an excessive price that was brought about by two significant events in Iraq in the late 1970s and early 1980s. The Iranian revolution is estimated to have decreased production by two to 2.5 million barrels of oil per day between June 1979 and November 1979. Shortly after, the Iran/Iraq War led to further production cuts and helped force crude oil prices from $14 per barrel in 1978 to the low $30s in the early 1980s.
At the time, global crude oil production was a little shy of 60 million barrels per day versus today, when the world produces well over 80 million barrels per day. Not surprisingly, global consumption of crude oil has experienced a similar increase from about 60 million barrels per day in 1982 compared with 88 million barrels in 2011.
OPEC attempted to set production quotas to keep prices lofty, but some members exceeded their limits, forcing prices to hover in the mid-teens for the remainder of the 1980s and much of the 1990s. In fact, the average annual price of crude in 1998 was $11.91!
In this current environment, it is easy for people to complain about “big oil” and high oil prices, but we should recall that back then, US oil companies were scraping at pennies to get by while Americans were naïvely filling up the tanks of oversized vehicles at the expense of oil companies caught in the crosswinds of OPEC policies.
As we later discovered, the glut of crude oil supply and depressed prices didn’t last. Even worse, discounted prices encouraged Americans to develop poor consumption habits (think large trucks and SUVs), which also contributed to shortages experienced in the 2000s.
Most oil consumers are unaware of the natural resources produced in the United States. Throughout the last 30 years, crude oil imports into the US have increased from seven million barrels per day to approximately 18 million, but exports have quadrupled from four million to 21 million.
In 2004, the price of crude broke through $40 per barrel for the first time and opened the door to massive speculation. This, combined with technology that provided market access to anyone with a computer, brought retail speculators to the market to create the new and exciting crude oil market that we are accustomed to today.
Unlike the market of 1982, during which crude saw gradual moves and traded between $34 to $31 all year, we now witness the price of crude change $3 in a single session — or sometimes in a matter of hours or minutes. Similarly, the crude oil futures traded on the NYMEX today are seeing more volume in a single trading session than they might have seen in a month of trading in 1982.
There are arguments about whether the widespread public access to the futures markets born in the 2000s benefits or hinders society, but the truth is the debate will likely never be settled. After all, the added liquidity to the market appears to be increasing price volatility, but perhaps we would see even more vicious price swings without the abundance of speculators...we’ll never really know.
QUO VADIS?
As a market participant, you shouldn’t be spending your time arguing why prices are moving; instead, you should focus on what they are doing and where they might be going.
During the 30 years that S&C has been published, crude oil prices have created distinct annual price patterns that cannot be ignored. Seasonal tendencies should be considered guidelines rather than the holy grail of trading; nonetheless, it can be helpful to know that more often than not, crude oil prices can rally from a February low and maintain an overall bullish bias throughout much of the summer.
In the previous five years, the seasonal highs have been averaging in the July and August time frame, but data going further back suggests supported prices into October.
To be continued in the October issue...