Is crude about to go higher?

Since hitting the multi-year low $33.87 measured by front month future contracts trading on ICE on 12/19/08, Western Texas Intermediate (WTI) light sweet has been stuck at a trading range between $34 and $48 so far this year. Today front month contract was closed at $33.98, almost exactly the same lowest level occurred two months ago. The most interesting question, intriguing many commodity and equity investors alike, is this the temporary bottom or just the beginning of another leg downward spiral to further unwinding excess bullish positions that had built up prior to the July peak last year. If we examine the current future term structure, we may come out with the conclusions that likely outcome in next few weeks WTI would go higher than lower. Since the term structure shifted from backwardation in late July last year to current contango, the spread between front month and 2nd month contracts has increased steadily. Today the spread reached highest level, about $8 (see Bloomberg chart below). Popular media provide some convenient and logical seasonal for current crude declining, such inventory buildup (highest seasonal level in last 10 years, but ironically the current inventory is below that last July, at the time crude reached all time high of $148), global economy melt-down and strong greenback etc. But the major driving force may be from commodity indexed ETFs and mutual funds "rolling" front month contract into next month causing this historical steepness in the front part of curve. It should not surprised that we are going to see some crude rebound in next week or so when the March contract expires at least in the shot term. After that, we would have to see how market can overlook current pessimistic statistics and look one step ahead.

Dollar and crude oil price

The skidding of dollars against the major foreign currencies, especially Euro were constantly blamed for the seemingly unstoppable skyrocketing crude oil price. The logical explanation for this relationship often quoted was that crude is traded in dollar and the weakening the dollar is the major reason the higher crude oil and hence gasoline price paid at pump. If the arguments for this negative relationship contributing to a high crude price. We would expect a significant correlations between crude price and dollar strength. Are there any significant correlations between oil and dollar? Regressing crude price with dollar index ( DXY ), we did found the strong negative correlations between the two beginning early 2006 up to now. The correlations reached to the highest at -0.96 today. However, this relationship were neither stable nor constant over time. We can see from the attached chart (the green area represents positive correlations and red areas indicated negative relationships...

Is US Treasury Yield Curve Flattening or Steepening?

There have been nine 25 bps rate hikes since the Fed tried to normalize short term interest rates, or Fed Funds rates, from Dec 17, 2015, the first hike to the latest of round on December 22, 2018. The short term borrowing rate rose from almost zero percent to the target of 2.25-2.5% as of now, and short term bond yields also climbed along with overnight rates. The benchmark yield of 2 year Treasury bond was near 1% when Fed made the first 0.25% rate increase on December 17, 2015, and it rose nearly 140% to about 2.39% as this note generated. However, the long bond or the yield on 30yr US Treasuries is traded at roughly 2.95%, almost the exactly where it was 3 ¼ years ago. The table below looks at the bond yield changes from the date that the Fed made the 1st hike to today. Also visually, the central bank’s gradual rate hike policy since 2015 has pushed yields on short (2 year) and intermediate term note (5 year) steadily marched higher and while 30 year bond yield fluctuated a...

What history tell us about “Sell in May and Go Away”?

US stock market has experienced one of the best first four-month performance over the last four decades, produced 17.5% price return comparing to 19.1% in 1987. It is the third best price return for S&P 500 index since 1950; the top four-month performance belongs to 27.3% in 1975 as the stock market recovered from a severe bear market in 1973-1974 when the index nosedived more than 42% in two years. With calendar flipped into May and onto summer season of sun, beaches, most likely we would hear a lot of about old Wall Street saying “Say in May and go away” in the media. Moreover, primarily because of the unprecedented nature of speed and magnitude of the current market rally against the backdrop of weakening macroeconomic and corporate earnings backdrops during the period. Sell in May and Go Way has delivered 6 times more return Historically, the six months between Nov-April frequently experienced extraordinary stock market performance than the six months between May to Oct...

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