Crude Range Reversion

Low volatility across asset classes and the globe has traders searching for opportunities. A quick scan shows one of the few global markets making significant daily moves is crude oil. What strategy can traders employ?

Investors often shun volatile markets as too risky. Yet traders usually require movement to make profits, and often embrace volatility. With currencies and indices displaying lower volatility, traders are increasingly turning to crude oil.

The daily chart of West Texas Intermediate shows a return to a range between $40 and $50 a barrel, in broad terms. The doomsayers that predicted $10 a barrel have gone quiet. Instead, the supply side response that saw US shale producers shutting wells, and OPEC and Russia rattling sabres, has calmed markets. Combined with estimates from the EIA that daily global demand will exceed supply at some stage before year end, there is a growing perception of a floor under prices around $40.

It's not all blue sky. Those same shale producers can quickly leap back into action, especially if prices head back towards $60. Additionally, record stockpiles in the US and China suggest the tap can quickly come back on. This could mean prices for WTI are capped around $50.

A volatile, range trading market anyone?

Note from the daily chart that the range is regularly broken. Since July 2015, each time it broke the range it returned, often trading to the other extreme, with the exception of the sell down to the lows. A strategic response to this situation is to treat the top and bottom of the range as Bollinger Bands, only responding when the price moves  back above $40 and or below $50 after breaking through. This may limit unnecessary stop outs, and offer an opportinity to hold a core position for a $10 swing.