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Volatile oil markets due to rising tensions in Ukraine

The headlines coming from Russia, and Ukraine are now talking of live firing, mortars, and shelling. It’s hard to know if these are reports of an actual escalation or whether they are false flags to incite an escalation. What we need to be aware of is the rising volatility in risk markets, especially the energy sector and commodities. Trading the USDCAD at the best of times can be hard, but that doesn’t mean we can’t look for high probability setups.

Technical Analysis - Oil

It is going to be a choppy day in the oil markets as the geopolitics in and around Ukraine have taken a turn for the worse. News reports coming from both sides of the border are talking of mortars being fired and the shelling of Russian positions. NATO and its allies in Ukraine are reporting back that there hasn't been any movement away from the border by the Russian forces and if anything, there has been an upgrade in the amount of personnel and equipment by Russia.

Whether or not any of this is true or just misinformation is going to be hard to tell and only in hindsight may we get the truth. However, on every headline the markets are reacting, which means volatility is rising. Where there is volatility there is also an opportunity, so the idea would be to look to see where we could enter and exit with the probability of a win in our favor.

Oil and energy will be one asset group that will move on the headlines and therefore USDCAD or any Canadian dollar currency cross should also offer opportunities.

At the time of writing the ActivTrader sentiment, the indicator is showing that 78% of traders on the platform are long the USDCAD, which to me says we should be looking to find a short opportunity in the Loonie. Using the same logic, we should also be considering where to trade to and from in Brent with the ActivTrader sentiment indicator showing 62% of traders trying to short the oil contract.

Looking at an intraday chart of oil I agree with the sentiment as the market structure has been broken to the downside. However, I am expecting a swift move down to the $89.30 level in a liquidity grab and would then expect the Brent price action to reverse into the weekend as risk builds of an escalation in the military situation.

With that idea as my base-case scenario, I would then expect to see the USDCAD sweep the highs of this recent range of 1.27960, before making moves to the downside.

Yesterday the US crude oi inventories headline figure showed a build-in in stocks, which is bearish for the oil markets under normal situations. There was also talk from within OPEC saying there could be an oversupply, firstly due to a lack of demand and economic growth due to geopolitics but also as Iranian oil is more likely than ever before to return to the markets.

This is not the day to be a trend follower as the headline news and algo’s are going to do whatever they can to stop as many traders as possible. However, for those long-term traders should we get a volatile breakout from this daily trading range I would be very interested in trading either higher to the 1.29103 or down to the 1.25156 price levels. We will need to be patient to see which way the fundamentals lead us.


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