Don Dawson
Online Trading Academy
We have all been watching this Stock market Bull run since the 2009 lows were in place. And of course that means many pundits have been trying to pick when it will end. Unfortunately for them and great for us, they have been wrong as usual. Oh, why is it good for us? If they are selling into this rally they will be providing liquidity for us trend followers. But eventually the Stock Market will run out of buyers and then there will be more sell market orders than buy market orders and the market will correct. When? Who knows!! Our charts will tell us when the trend changes and we can then sell into the bear market rallies.
While the Federal Reserve’s Quantitative Easing policy helped to provide liquidity to the markets during this bull market it also provided capital for international and domestic infrastructure to be built. To have the ability to build this the world needed energy products, namely Crude Oil.
There are two primary oil markets in the world – Brent Crude Oil and West Texas Intermediate Oil (WTI). Brent is a product of the North Sea and is traded on the Inter-continental Exchange (ICE) and West Texas Intermediate is a product of North America mainly Cushing, Oklahoma and trades on the Chicago Mercantile Group Exchange (CME).
Brent has been the benchmark of the oil markets for many years. Brent is a better quality of oil and requires less refining than WTI. Over the last 4 years the Spread has been as wide as $23 premium to Brent. Today it is back to a more normal parity. When a market can carry a premium like the Brent did to other oil products you know it is in high demand around the world.
Energy products are in such high demand around the world all year long and this is during normal times. But imagine when there is extra demand? What do you think that does to the price structure of energy products? Or what would happen if there was all of a sudden lack of demand?
To measure this demand we can follow the price structure of these products by looking for contango and backwardation in their prices.
Table 1 is an example of the price structure of both WTI and Brent on the day this article was written.
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