Oil…..running scared!!

Oil…..running scared!!
At the moment oil appears to be that commodity where
traders are just running scared. It doesn’t really matter
what bearish views you put to the market traders are
just content with taken it higher. We have just fallen
short of the US120.00 level and with the geopolitical
picture heating up in Nigeria/Iran; strikes in Scotland
and inventory draws in the US, traders are expecting
prices to remain firm. So given these latest develop-
ments we feel it is appropriate for us to question Oils
ability to head upwards of US120.00.
In past reports we have been suggesting that the fun-
damental picture just does not add up to prices being
above US100.00. Why, we are about to enter into a re-
cession; we have oil inventories at levels which are not
critical; gasoline inventories at 15 year highs and sea-
sonally at a period of shoulder demand. At a time when
prices should be leveling off they are firm. Why? So
after much discussion and contemplation we have ar-
rived at two main reasons we feel why sentiment is so
bullish;
1. Governments around the world stockpiling
2. Profitability on refining oil into petroleum frac-
tions.
Governments Stockpiling:
Over the last couple of years we have seen the emer-
gence/growth of Sovereign Wealth Funds (SWF) and
we see these funds becoming more influential in the
markets in particular in the commodities. A SWF is a
state owned fund purely initiated by Governments to
ensure economic stability and to seek return. Of note
has been the emergence of these funds in the com-
modity markets helping to insuring economies against
price shocks such as what is occurring in Oil.
As we are aware the demand/supply picture for Oil is
balanced at about 86 million bpd. We have seen this
balance upset several times on the back of Geopolitical
events namely in the Middle East and Nigeria with the
resulting consequences well known. Given this poten-
tial maelstrom and our dependence on oil, any major
occurrence particular in the Middle East would have
devastating effects. Therefore there is a growing need
for Governments to orchestrate supplies for there
economies. Stockpiling the commodity provides a
breathing space if disruptions happen to occur and this
is fast becoming common practice among those na-
tions
which rely on imports of Oil to meet demands.
In the US for example the Strategic Petroleum Reserve
(SPR) is the key reserve the US has. It stands at 701
million barrels or 33 days of supply to meet current
consumption patterns. Due to the instability of the bal-
ance of supply and demand the Government has man-
dated to increase the SPR by 100% there by pushing
out the days of dependency to 66 days. Although this
increased demand equates to only about 70,000 bar-
rels or .33% of daily consumption in the US it is the
sentiment created that is driving consumers and other
Governments to act on initiating or increasing stock-
piles. If the US relaxed their purchases, which is being
argued in the Senate at the moment, for the SPR then
we think this would send a clear message to all that we
should not be as concerned and this should see prices
retreat.
Profits on Refining:
It is interesting to note that Gasoline supplies have
been retreating from 15 year highs and the market is
taking this as a sign that we will not have enough sup-
ply to meet Summer Drive time demand in the US. In
addition to these inventory draws we see refinery utili-
sation rates low which can present an ominous sign for
supply in the future. This rhetoric has been keeping
prices well bid however; looking between the lines we
can see that there is a good reason why the draws are
occurring and why utilization rates are low. It all comes
down to economics, in fact the profit from refining
crude ie the “crack spread” which is the differential be-
tween the price of crude oil and the petroleum products
extracted from it is historical low and at levels which
encourage refiners not to refine or wait until the spread
Phone 1300 660 734
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28th April 2008
is more profitable.
Valero Energy Corp. the largest US refinery is one such
example where low refining margins have resulted in a
poor Q1 performance. It issued a statement recently
suggesting that profits for Q1 have tumbled by 77% due
to the profitability of the crack spread. This is in stark
contrast to other Oil companies such as Conoco-
Phillps , Royal Dutch and BP who have all reported
sharply higher results for the quarter. Valero noted that
although conditions are improving they had been deal-
ing with a spread that was US3.00 to US6.50 a barrel
well down from the 5 yr average of US8.50. The spread
only recently has been as high as US 37.00 a barrel.
So with profitability so low isn’t any wonder that you
would put the breaks on production until prices firmed.
This result is once again forcing sentiment as people
fail to realise the true meaning
behind the draws and refining rates. Once profitability
returns to the Refiners they will step up production and
this should see inventories increase which should see
sentiment ease and prices retreat.
So are we forming a bubble like we have seen so many
other commodities?
Most bubbles occur when prices over shoot their mark
beyond the fundamentals and panic sets in. These
cause irrational movements in the prices and as fast as
it moves higher it moves lower there by balancing the
move. The bubble is traditionally characterised by a
“blow off” in prices. Gauging whether or not we have a
bubble in oil is a little harder as the increase has been
solid and we have not seen a “blow off” yet. Recent ex-
amples of this can be seen in the Wheat markets where
we have seen a 30% correct on the price of the com-
modity within a month. We have not yet seen this occur
in oil, however, we are monitoring the price rise to
US120.00 to see if prices sharply come off.
It is interesting to note that up until the US and other
countries change their rhetoric towards the SPR or
stockpiles and the crack spread widens then sentiment
towards oil will remain strong. Any geopolitical concern
will only add weight to the underlying story concerning
supply tightness. So we can suggest that dips will be
well supported until these issues change.
What does the technical picture look like?
Technically, we can see that we have a double top at
US120.00 so traders will be working off this level to im-
plement trading strategies either to sell into or to place
a stop loss /entry. Momentum indicators are over
bought and this should see some profit taking enter the
market. This profit taking should be limited to support
at US110.00 then US100.00 The bull trend of the move
from US50.00 is still
with us as long as US95.00 stays in tack. We would be
looking for a move back to US110.00 possible over the
coming
week. A break above US120.00 can be seen as an op-
portunity to add to long positions or go long. Only a
break below US95.00 will see a reversal of the trend.
Yours Faithfully,
Jonathan Barratt


Commodity Broking Services Pty Ltd AFSL 280 372 FICS 4312
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any loss or damage, whether direct, indirect, consequently or otherwise how so ever a rising (whether in negligence or otherwise) out of, or in connection
with the contents of and/or any omissions from this communication
Please do not hesitate to call concerning any
of the above. I can be reached on direct call
1300 660 734.
Jonathan Barratt

A Professional's Guide to Not Losing Your Mind Or Your Profits

This is a very interesting look at the amateur traders mindset, and what you shouldn't do as opposed to what you should do to make money

written by DC Bonta:Forex Amnesia:A Professional's Guide to Not Losing Your Mind Or Your ProfitsToday, we're going to do something a little different.I'm just going to ramble.I'm just going to take you through a handful of scenarios and paint a picture for you about how critical it is for you to meticulously plan your trade… and then forget about it.I call it Forex amnesia.Ready? Then let's get started…The Planning PhaseThe most critical aspect of trading is planning the trade.This means looking at the charts, knowing where support and resistance levels are and targeting potential trades from those levels. Having a clear view of the market before you enter a trade is key.This eliminates emotion and allows you to stay focused even in times of extreme volatility (like during a news release) when everyone else is going crazy. You should be able to see a trade set up long before price gets to a point where you pull the trigger.The Trigger PhaseAnd once you pull the trigger and enter the market with your pre-determined profit target and stop loss your work is done!The Amnesia PhaseNow, your job is to totally and completely forget about what you just did. Erase it from your brain. This is a hard concept to grasp because I know you are still staring at the screen as every pip goes up and down…Now, you're getting nervous because it's not going quick enough in your favor…It almost hit your stop loss, maybe you should move that stop up just in case…Whew, it didn't hit your stop loss and now you're up a few pips…Now you're thinking, "I should just close this out at a small profit, I almost got stopped out before and it will never hit my profit target… I'm getting too greedy."This is what goes through the heads of LOSING traders.If you start changing the terms of the trade in the middle, you seriously hurt your long-term success. Let the trade complete itself and live with the results, good or bad.A Look Inside The Trades Of A Pro… And How He Uses Forex AmnesiaI'll give you an example of how this works with a pro trader that isn't even average. In fact, he stinks… he's only right 40% of the time.Here's the set up…* 10 trades* Stop loss at -10 pips* Profit target at +20 pips* $10,000 initial balance* Trading 1 standard lot per trade.And here are his results…* 4 winners x 20 pips x $10 per pip x 1 lot = +$800* 6 losers x 10 pips x $10 per pip x 1 lot = -$600The net gain from our pro trader (only being correct 40% of the time) with solid money management is +$200.He was able to do that because he did his homework and planned well, pulled the trigger on his 10 trades, and then forgot about them, letting them ride with the market.An Inside Look At An Amateur… And How He Micromanages Every PipHere's what an amateur might do with those same 10 trades…* Trade 1-He saw it was moving against him and moved the stop to -20, which was also hit* Trade 2-It moved in his favor and he closed it out +10, price eventually hit the original target of +20* Trade 3-It moved so fast, he couldn't close out early and it hit his target of +20* Trade 4-He was convinced he was right this time and moved the stop twice to -30, which was hit* Trade 5-It moved against him fast and stopped out at -10* Trade 6-It moved against him and he held steady at -10* Trade 7-An agonizing trade, it almost stopped him out, then went in his favor slowly. It made it to +13 and started stalling. Fear set in that is was going back down and he closed out +11* Trade 8-He's learning, stopped out -10* Trade 9-The best thing that could happen, he had a meeting and could not watch the computer. When he got back, the trade hit the profit target of +20* Trade 10-He's really feeling confident, so as price moves near his stop, he moves it again and loses -20Now, let's add up the damage. Mark this point very carefully… he had the same winning percentage of 40%. But look at what a difference it makes when you don't have Forex Amnesia…* 4 winners (61 pips total x $10 per pip x 1 lot) = +$610* 6 losers (100 pips total x $10 per pip x 1 lot) = -$1000The net gain from our amateur trader (still correct 40% of the time) with horrible money management is -$510

Ten Ways to Improve Your Market Timing

Ten Ways to Improve Your Market Timing

It's December and getting close to the time when traders need to wrap things up and evaluate their profit-and-loss performance for the year. Unfortunately, most folks speculating on the financial markets in 2007 face major disappointment when they look at their results and realize how tough it's been to make money.
Sadly, most traders follow the same worn-out strategy over and over again, regardless of market conditions. They just buy upside momentum and hang on, hoping the bottom doesn't drop out of their positions. But as we know in this volatile trading year, almost every sharp move higher or lower has been followed by a vicious counterswing.
It's easy to dismiss this ragged price action, believing it's just an aberration in an otherwise perfect bull market, but nothing could be further from the truth. In reality, a choppy and dangerous tape is the most common environment in which traders need to risk their capital and book results.
That's why the concept of market timing is so important. Regardless of short-term conditions, every position is forced to negotiate a minefield of conflicting time elements in order to book profits. Simply stated, it's the gateway through which you take on monetary and emotional risk.
So what's the best timing strategy for your next trade? Unfortunately, the correct answer changes over time. As a result, market players must plan each trade within the context of the current environment, reward-to-risk profile and pre-chosen holding period. The good news: This extra effort pays off handsomely on their bottom lines.
Had a tough year picking your fights and choosing your exits in 2007? Well, it's time to shake it off and get ready for the new year. To help you get things started on the right foot, here are 10 things you can do to improve your market timing.

1. Sell Rallies: Stop selling short into selloffs. Instead, wait for weak rallies to fail at resistance. Then use the breakdown of a two- or three-day topping pattern to enter your position.

2. Play Pullbacks: Pullbacks work in all kinds of market conditions, so use them to take on all kinds of exposure. Stand aside when a new trend gets underway and stalk the chart until a counterswing forces price back to the level where you wanted to play it in the first place.

3. Enter in Quiet Times: The best time to enter a position is just before a breakout or breakdown. That way you can sell your position for a nice profit after other traders trip over themselves to get on board. Find these setup points using narrow range and volatility contraction patterns.

4. Follow the VIX: The most profitable trades show up when the crowd is leaning the wrong way. How can you see this happen in advance? Become a student of sentiment and track the Market Volatility Index (VIX) for reversals after sharp peaks and valleys.

5. Keep Sector Lists: A rising market floats all boats, even the leakiest ones. But in tough times, it's wise to play the strongest stocks in the strongest market groups. To this end, keep sector lists that show relative performance on a weekly basis, and then limit your trade search to the cream of the crop.

6. Mark the Gaps: Watch the gaps on the major indices and assume every one will fill, sooner or later. Avoid aggressive trade entry after a gap unless the market is in a running trend. Expect indices to turn on a dime as soon as a gap gets filled because smart traders use these pivot points to take profits and establish contrary positions.

7. Match Time to Opportunity: Decide your holding period before you enter the trade, and then stick to it. Are you scalping, daytrading, swing trading or picking up an investment for the grandkids? Keep separate trading accounts if you want to do all of the above.

8. Exit in Wild Times: Take profits in high volatility, whenever possible. Prices move through relatively narrow boundaries most of the time. Wide swings, triggered by greed or fear, open the floodgates and let the market move very big distances over short timeframes. Use these magic moments to book your profits and jump back to the sidelines.

9. Track the Pivot Points: Focus your attention on prior highs and lows, whether they're two days old or printed in the last decade. Traders use these focal points to make the majority of their entry and exit decisions. Learn to wait for the second test of a high or low, rather than jumping in too soon and getting stuck in a double-top or bottom reversal.

10. Read the Tape: The numbers on your trading screen are far more important than the pretty pictures they draw on the charts. Memorize key levels on your favorite stocks and then watch what happens whenever price approaches one of these inflection points. Yes, tape reading takes years to learn but it gives you a lifetime edge, so it's worth the effort.