March came in like a lamb and is going out like a lion for crude

March 26, 2015 01:39 PM

The old adage “March comes in like a lion and goes out like a lamb,” has played out in reverse order for the WTI crude oil market this year. In terms of crude oil, March has come in like a bear and is going out as a bull.

Of course, there are still several trading days left in the month.

Here’s a recap

WTI crude futures have been trading in roughly a $10-range ($44-$54) since setting a six-year low below $44, in what many analysts believed was the bottom of this historic move that saw the price of crude more than cut in half. WTI crude futures opened March on a rebound from the February low close of $48.17 on Feb. 26. That rebound failed to test the upper band of the recent range, failing at the March 5 high of $52.40. From there crude tanked more than $10—losing roughly 20% in the next 10 sessions and breaking below the long-term trendline dating back to the 1998 low of $10.65 highlighted in past posts.

Bull reversal

Just as everyone was getting back on the bear bandwagon, crude reversed again and has rallied 25% from the March 18 low of $42.03 to today’s high of $52.48. That is a 25% move in just over a week! Currently crude is trading $2 below the high, an indication that the most recent reversal is getting tired—or perhaps just a bit of profit taking given the dramatic move.

Now what?

Traders may have made or lost significant money on either side of the crude oil market in March. The only trade that most likely was successful this month would have been a long strangle or straddle.  

PRICE Futures Group’s Energy Analyst Phil Flynn believes the low is in citing technical, seasonal and fundamental reasons.  Flynn points out that the recent low occurred just prior to rollover when traders were already focused on the May expiration so the $44 support area is still intact. He also says that we are at a seasonal high in inventories and this should only become more bullish from here. And of course the biggest concern is the conflict in Yemen with “Saudi Arabia launching airstrikes against Iranian backed Shiite rebels putting about 3.5 million barrels of oil exports at risk.”

We noted in the past that one of the early sign of weakness in the crude oil market was when the market failed to have a significant spike higher in the face of numerous geopolitical concerns surrounding conflicts in the Middle East more than a year ago.

It is too soon to tell how the market will price in the current conflict. We will follow how the market reacts to the conflict in Yemen. Logically you would think that the market would be more sensitive to geopolitical concerns with crude trading around $50 per barrel than it was trading around $100. But as we have seen, logic may not have much to do with it.

And the month of March is not over. With the huge spike in volatility it may not be time to pick a side. Remember the current reversal occurred after the market made a new low by $1.50, so a rally beyond the upper portion of crude’s recent range ($54) does not necessarily mean bulls are in the clear.

Given what has happened technically we wouldn’t be surprised if crude dips again and battles over that long-term trendline, which is currently straddling the $47 level, early next week as the month of March mercifully comes to a close.

If April showers bring May flowers, what will March volatility bring for crude oil futures? 

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.