The next set of forecasts have moved in the November expiry date. Considering that this date is after the USA elections and Iran Sanctions, these events will have a big impact on the prices. The following is what I think will happen after these two events:

• China will continue buying Iran oil
• USA allied countries will be in slight disarray as their find new sources to purchase from
• Saudi and Russia will attempt to catch market share by pumping more oil, selling it to the countries that complied with Iran sanctions and probably charge these countries a little more
• USA will probably try to do the same with their shale oil

I don’t think the loss of Iran production is actually a big impact of itself, USA, Russia and Saudi can make up for it. But the market reaction to the sanctions will be overblown to the upside, along with Saudi’s desire to raise the prices.

Forecasting Checklist

• Oil industry news
  • Political Plays?
    • The USA China Trade War doesn’t seem to make much of an impact any more. Either the market has priced it in, or that people are not suspecting that demand will be affected that badly. v
    • Saudi says it is OK with $80 Brent ^
    • There have been some reports of USA now becoming the world’s largest producer of oil. Whether it’s true or not, basically oil production is now in a ‘three kingdoms’ situation between the USA, Russia, and OPEC Saudi.
      • OPEC Saudi and Russia are in cooperation to make what they can from oil, boost their market share, but not push the price so high that demand from developing countries suffers or that USA’s shale becomes profitable for the USA. This is a difficult balance to achieve, and it seems the range of $70 to $80 Brent is their short-term target. With gap of Brent to WTI of about $10, this would translate to a price of $60 to $70 WTI. ^
      • Saudi wants to appease the USA by keeping a lid on prices now, but might not do so after the USA’s upcoming election.
        • Iran has been Saudi’s rival, so with USA helping to place sanctions on Iran, Saudi will continue to ally with the USA for a while on that front.
        • I think Saudi wants to raise prices (but not too much), but still a raise from where it currently is. ^
  • Level of uncertainty?
    • This is still high and will only start resolving itself starting in Nov.
    • USA stock markets are at record highs again.
  • Upcoming events/meetings?
    • US Midterm elections: 6 Nov 2018
    • Hard deadline on Iran sanctions: 4 Nov 2018
    • Russia and Saudi, amoung others, are scheduled to meet this weekend to discuss their oil production strategy going forward. I have a feeling there will be a price spike after this event. ^
  • Oil discoveries or disruptions?
    • USA oil inventories are decreasing. ^
• Check status of economies
  • Oil demand?
    • See above comment on trade war
• Check other charts for movement
  • USD
    • USA has been weakening slightly. ^
  • Gold
    • Gold has gone flat recently.
• Technical analysis
  • There seems to be a price support at the $64-65 level. ^
  • IV percentile is lowering
  • TTM_LRC ranges
    • WTI prices are now in the upper 1SD range
• Check Chart discrepancies
  • Quarterly expiry of futures and next futures chart
  • Gap between WTI and Brent
    • Prices have a difference of about $10, which is relatively wide, or at least wider than usual. ^

The Forecast

The next set of forecasts have moved in the November expiry date. I believe there is a price floor and the upside to the price of oil is unknown, but I think the price is generally bullish. The WTI price is currently about $71.20.

• I am 85% confident that the price of WTI oil will not be below $63 on 14/11/2018.

This week is another strange week, with nothing major happening. Again, small news seems to be sending the market too overblown in one direction or another. After reviewing the news, I think there is a weird equilibrium in the oil markets but paired with high uncertainty. Still the current floor for oil prices seems to be about $64, and the ceiling seems to be 72. I think the floor is more solid than the ceiling, and I do think there is more upsize potential for oil than down. The reasoning being that if the price goes too low, the suppliers will start to cut their supplies again (which they have done before). And if the price gets too high, then the producers will simply let it be to earn more. It would seem that we are only going to get a solid price action indicator in Nov.

Forecasting Checklist

• Oil industry news
  • Political Plays?
    • Iran’s sanctions are on Nov 4, which is still after the current trading period
    • Seems like India has joined China in planning to continue to buy Iran oil after the Sanctions
      • However, I think the market reaction when the sanctions hit is to push the price up. ^
    • The rising oil prices over recent months has helped Saudi earn more than they expected
      • They might want the price to continue up to earn more ^
    • Russia’s oil output is at record highs  v
    • I was watching a news clip on the US-China trade war (no link). The expert on the show was saying that the rationale for the trade war really was to hit back at China for all the aggressive things it’s been doing over the past few years. These aren’t just the economic plays they have made and the IP theft. It apparently is to hit back at the territory in the South China Sea that China has claimed, the lazers shone on American planes, and to shake confidence in China’s leadership amongst the China populace. Basically, the expert said it was a power play for US.
    • • Another show I watched talked about the idea that US is the superstore selling stuff to the end consumers, and China is like a vendor, making stuff for this superstore. This would mean that US would have some power over China, in terms of choosing whether it wants to purchases goods and services from them. This tariff is the US government’s way of forcing US businesses not to choose China.
      • I think with this insight, we might be getting a better idea of the end-state of these trade war
      • I don’t think the trade war would actually dampen oil demand, but the reaction to the market will probably still have the ‘demand fears’ the next time tariffs roll around again
  • Level of uncertainty?
    • Uncertainty is still pretty high right now.
    • With all the ups and downs and market forces pulling on both sides, it could be that the current prices are at some sort of equilibrium.
  • Upcoming events/meetings?
    • US Midterm elections: 6 Nov 2018, They will want to keep the price down then.
      • Which is probably why they are trying to sell their own oil reserves.  v
        • I’m still wondering the true reason they are doing this though.
  • Oil discoveries or disruptions?
    • A storm warning which would have affected some oil rigs, now found to not be as bad as originally thought, was enough to spike prices this past Tuesday. This seems to show me that the prices are just going to react to every little thing for the time being.
• Check status of economies
  • Oil demand?
    • No news to threaten demand this week
• Check other charts for movement
  • USD
    • Price has gone up over the past week. v
  • Gold
    • Price has gone down over the past week. v
• Technical analysis
  • MACD
    • Is indicating the that recent price run-up is abating
  • TTM_LRC ranges
    • Just lower than the middle line. Still in the lower 1SD zone
  • There seems to be a support line at about the $64 mark as prices have not crossed below this line in 4 months. ^
• Check Chart discrepancies
  • Quarterly expiry of futures and next futures chart
    • Current futures expring in 15 days, trading at a 28cent premium
    • Current futures trading at a $2.95 premium than one year away futures contract
  • Gap between WTI and Brent
    • Brent is trading at a $8.43 premium to WTI. ^

The Forecast

With both the upward and downward forces in play yet again, I think I’ll make an iron condor style prediction as I do not think the prices are moving much one way or the other. Considering that the current price near the middle of the TTM_LRC bell curve, things can swing either way, and I don’t want to be caught out if it swings against me. The current price is around $68.95. Still, I think it is a good idea to trade further away from the market, considering all the uncertainty.

• I am 75% confident that the price of WTI oil will not be below $61 and not be above $76 on 19/10/2018

This forecast was a day later than usual as I was waiting for the US-China talks today to be over. It is still on going, but I feel I can move on. The trading dates have change, and the target expiry date is on 19 Oct 2018.

The name of the game this time round is uncertainty.

Forecasting Checklist

• Oil industry news
  • Political Plays?
    • Trump wants lower oil prices in the run up to the US midterm elections. v
      • This is at odds with the US drillers who need a higher price to profit.
      • Even so, Trump doesn’t have as much power to bring down prices as some of the other countries, like Saudi and Russia.
    • China is continuing to buy Iranian oil, despite sanctions. v
    • However, other countries have cut back on Iranian oil, and I think even the China demand cannot fully replace the ‘lost’ Iranian oil supply. ^
    • The China-US trade war is spooking markets. v
      • However, the recent few days of price rises are due to USD dropping, and the oil reserves in US having a surprise draw down on the week ending 17 Aug 2018, i.e. last week. ^
      • This means that during last week, when there was a market spook over the trade war, oil demand was actually still pretty high. I would take it to mean that these trade war fears are currently still only fears and the underlying market numbers have not changed as much. Either that, or the effects of the trade wars have not been fully realised. I could even say that the trade war could have no effect on oil demand, but I don’t think that is the case. Still, I think these trade war fears are more overblown than they actually are right now.
  • Level of uncertainty?
    • As above, the level of uncertainty is still high. For example the US – China talks today, were not expected to resolve the trade war, but the meeting’s conclusions could still move in unexpected directions.
    • Right now there are two narratives at odds with each other. Both are expected to affect the oil price. The Iran oil production lost (along with some of the other unstable countries like Venezuela) will push prices up. On the flip side, the trade war will disrupt economic growth and bring down demand for oil, and thus push the oil price down.
      • The US economy has just broke the record for the longest bull run in history. If it’s been on a bull run this long, surely there must be a recession of some sort around the corner. The market has always worked in cycles. We just don’t know when or how the next significant bear market will happen. But when a bear market does hit, then oil prices will definitely head downwards.
  • Upcoming events/meetings?
    • US China talks on 22-23 August 2018
    • US Midterm elections: 6 Nov 2018
    • Hard deadline on Iran sanctions: 4 Nov 2018
• Check status of economies
  • Oil demand?
    • As above, there seems to be a fear that demand will take a hit because of the trade war, but it actually hasn’t taken a hit yet. Barring a proper bear market, I don’t think demand will reduce significantly.
• Check other charts for movement
  • USD
    • The USD has dropped significant;y recently due to Trumps comments on the FED raising rates. ^
  • Gold
    • Gold has finally started to rise after a 2 month long losing streak. ^
• Technical analysis
  • TTM_LRC ranges
    • The price of oil have jump back up into the -1SD range. At least it shows that the TTM_LRC lines form a pseudo resistance line that can hold for now. ^
• Check Chart discrepancies
  • Quarterly expiry of futures and next futures chart
  • Gap between WTI and Brent

The Forecast

With so much uncertainty, I think I’ll make a iron condor style prediction to play it safe.

• I am 70% confident that the price of WTI oil will not be below $61 and not be above $74 on 19/10/2018

For this week the prices seem to be going down. There seems to be a month-long downtrend in contrast to the 6-month long uptrend. It is pretty confusing to me where this is going to go. Not forgetting that I am trying to forecast within 1-2 months into the future.

Forecasting Checklist

• Oil industry news
  • Political Plays?
    • More sanctions, see below.
    • On the supply side, I think countries are still going to taper their needs to the level of demand. There is unlikely going to be an oversupply situation. Countries seem to have the motivation to keep the prices up, or at least stable where they are at now. ^
  • Level of uncertainty?
    • Pretty high now with sanctions on Iran, Turkey, Russia, and trade war with China. The market seems to finally be pricing these in. v
  • Upcoming events/meetings?
    • Nothing major for now
• Check status of economies
  • Oil demand
    • It seems that the downward force in price this week is due to the demand not being as strong as predicted. This was shown last week when it was revealed that Saudi had cut their production in July as they couldn’t find enough buyers for their oil. The reason given for the lack of demand is the high uncertainty due to sanctions and trade war. v
    • It is easy to see why demand is low right now, but I find it really hard to predict it. I think nobody really knows right now, which is why uncertainty is high. One ‘surprise’ crude oil stock increase and the price can move down slightly. v
    • Still, these things are pretty short-term (week to week basis) and things might change soon with the different level of political plays. It could be that these uncertainty scares are just scares, but the underlying market forces are still there.
• Check other charts for movement
  • USD
    • USD is going up. Strange that it goes up despite the uncertainty in the world, but I’m no currency trader. v
  • Gold
    • Gold is continuing its long-term slide. v
• Technical analysis
  • TTM_LRC ranges
    • The price is touching the 6month 1SD line. I don’t think there is enough downward force to force the price to go lower than a certain point, but there doesn’t seem to be to be enough force to it to bounce back. Still, it will probably stay here for a while. ^
• Check Chart discrepancies
  • Quarterly expiry of futures and next futures chart
    • The next futures chart starts in 6 days and the price is about 50 cents lower than the current one. v

Other Things of Note

I still cannot figure out the end game of these sanctions and trade war. Knowing the end game will make me confident in the forecasts.

The Forecast

I still have a bullish view of prices, but I do have to say I am not too confident this week about my forecast. I do think that this time around, I will make a range bound type of prediction as I think the price is going to trade range bound and I don’t want to lose out in terms of paper losses on my trades if I were to make a single leg vertical spread trade.

• I am 75% confident that the price of WTI oil will not be below $59 and not be above $72 on the 18/09/2018

This is the second forecast so far. the previous forecast is still profitable. I have to remember that the forecasts are at most for two months in the future. Even so, in two months, a lot of things can change.

Forecast Factors

1. Oil industry news
   • Political Plays?
     • Iranian Sanctions are in full effect now. ^
       • Putting sanctions on Iran means the US gets to export/sell more of their oil at higher prices to more countries: Countries who comply with the sanctions have to buy their oil from somewhere else. And that that somewhere else could just so happen to be the US.
     • Saudi Arabia cut their production in July apparently because they could not find buyers. This could signal that there is a potential oversupply issue with all the major producers stopping their production cuts. At the same time, the fact that they cut their production to match the demand shows that countries will act in the way that best serves themselves. Their act of cutting production for now at least pushes the prices slightly higher. In the future, if demand is not as robust, they will possibly cut production again. ^
     • Venezuela is imploding on its own. ^
     • US-China trade war still going on.
   • Level of uncertainty?
     • It would seem that the feel of the market is still pretty uncertain. With news pushing the price up one day, then down the next. ^v
   • Upcoming events/meetings?
     • Nothing in particular, though there is an OPEC meeting on 3 Dec 2018.
   • Oil discoveries or disruptions?
     • There was word of a new field in Pakistan, it won’t matter much in the short term.
2. Check the status of economies
   • Oil demand
     • If Saudi Arabia cannot find buyers for oil in July, I would think that demand isn’t growing as much as people expect it to. Or at least, it’s not a big enough factor to push the prices up. ^
3. Check other charts for movement
   • USD
     • USD is flat-ish in the short term but still have a longer-term uptrend despite the trade wars and such. It would seem that trade wars which are bad in the long run have not been priced in by the market. v
   • Gold
     • Price of gold has been steadily dropping. v
       1. These other charts show that the oil price should be going down, but it isn’t. It might be that oil has other bull factors that are stronger so that it will go up for now. However, these bearish factors need to be kept in mind.
4. Technical analysis
   • TTM_LRC ranges
   • • Shows a long-term uptrend TTM_LRC. ^
     • Recent candlesticks are within the lower 1SD range. ^
   • Support/Resistance
     • There seems to be a support line for oil at around $84. ^
5. Check Chart discrepancies
   • Quarterly expiry of futures and next futures chart
     • There is about a dollar difference downward in the next futures chart. But this difference is small.
   • The gap between WTI and Brent
     • Gap still exists, but nothing noteworthy here.

Other Things of Note

My perspective on Trump is that he has business interests (not necessarily his own, but those of businesses in the US) in this political moves. The best example I have is the first day he was in office, Trump approved the Keystone XL pipeline. This pipeline was controversial, to say the least. After months of lobbying and campaigning, Obama finally decided to stop the project. Then trump gets elected and 4 days after his first day as president, he approves the building of the pipeline. Of all the things to approve immediately after becoming the president, he chooses this. I smell a rat somewhere. A lot of oil-related businesses would benefit from this, and I think, were pulling the strings to get this pipeline approved as soon as possible.

The Forecast

I still have a bullish view of the situation for now. Or at least an “oil isn’t going to go below $X for now” type of view.

• • I am 80% confident that the price of WTI oil will not be below $63.5 on the 18/09/2018.

Introduction

In my first year being an options trader, it was a pretty rough ride up and down and up again and ultimately down again. I survived for a year but not much longer after that. I realised that even though I could be profitable, there were still many things I didn’t know yet and experience that I needed to gain. Looking back, it seems almost like a stroke of luck that I was profitable when I was.

Since then I have ‘gone back to school’ and learnt more about the art and science of options trading and have a better grasp of the practice.

I have to give a give shout out and thanks to my family. They were so supportive as to learn options trading themselves so that they can understand what I do and experience. I have the best family ever. They too motivated me to get my head back into the game, and now trading is a family activity.

The last time I did trading, I had a pretty weak system of forecasting, double checking the trade conditions and recording my trades and tracking my progress. Now that I want to do it again, I decided that I will need improvements to all of the above. Thus, you see before you the oil option forecasting game, setup and rules. Below will be the rules I will adhere to while forecasting what trades to make. These forecasting rules were also inspired by the book Superforecasting, which stressed the specificity in forecasting.

Rules of Forecasting

1. Every week (likely Wednesday) I will make a forecast on the price of oil.
   1. The type of oil referred to is known as West Texas Intermediate crude oil. The ticker symbol is /CL.
   2. Each forecast is be accompanied by evidence for or against the forecast.
2. The forecast will be that of where the price of oil is not going to go. This is based on my options trading strategy, which is mainly being a net seller of options.
   1. Alternatively, the price is known as Out of The Money (OTM).
   2. Based on the appropriate strategy, the forecast might be instead a price range where the price of oil is predicted to stay in.
3. Each forecast will be for an option expiry date that is at least 2 monthly options away.
   1. For example, if today is Jan, I will make a prediction on the monthly option that will expire in Mar.
   2. The specific end date for each of the oil price predictions is the 3rd Friday of each month, as per the usual option expiry date.
4. I will use the probability of OTM calculation as the baseline for the forecast confidence.
   1. I will choose from the option OTM probability of 70% to 90% as the baseline.
   2. I will adjust my confidence from the baseline by a few percentage points based on external market factors that might affect the price.
5. The forecast must have a precise numerical value of the prediction confidence, price, direction(above or below) or range(between price to price), and date.
   1. The final forecast statement will be written as, for example: I am 81.5% confident that the price of WTI oil will not be below $65.50 on the 21/09/2018.
6. The forecasts from week to week may change drastically. This will be decided by my desire to ‘win’ and also because market conditions might have gone in a totally different and unexpected direction.
   1. These changes will be done regardless of the forecast the week before. Each forecast will be standalone with no way to ‘change’ the forecast once it has been made. Each forecast will not be considered as a ‘correction’ of the previous week’s forecast.
7. A ‘win’ is when the forecast turns out to be true and the price remained OTM on the stated date. Alternatively, a ‘lose’ is when the forecast turns out to be false, even if it price crossed In The Money (ITM) by a hair of a cent on the stated date.
   1. The date of the forecast is important, for example, if the price crossed into ITM territory but crossed back to OTM territory later on and stayed OTM on the stated date, it counts as a win.
8. All forecasts will be tabulated as with a Brier Score. These scores will be released after each option expiry period when the forecast ends and the win conditions can be calculated.
   1. Generally speaking, the lower the Brier Score the better. A score 0 is perfect, while a score of 1 means I am either the worse trader imaginable or the unluckiest person on earth.
9. The purpose of the game is to also make options trades on my forecast. I will make a trade with each forecast. However, I may choose to not make a trade based on my confidence in my own prediction, other extraordinary market factors, and times of extreme market uncertainty.
10. The options traded, their profits and their success will differ from the forecasts I make. This is due to the following scenarios:
    1. Part way during the forecast for each trade, if it makes sense to exit a trade early, then the profit or loss will be taken before the forecast ends.
    2. Part way during the forecast for each trade, if it seems like a ‘lose’ outcome is inevitable, then trade adjustments will be made to reduce the loss or turn it into a profit.
    3. In essence, the forecast and the options trade start at the same place but might divert as time goes on.

Starting the forecasting game

As mentioned, I will start to forecast and put my forecasts up here every week. How I envision it is that I will review the general scenario of the market, news reports, and points that support and go against my thinking, then finally I will make the forecast.

Monthly, I will also review the success and failure of my forecasts and look at the Brier Score.

Note that the status of the options that I trade will not be reported or made known. Other than privacy, the main reason is it will be too tedious to report this. It will get even more confusing and tedious to report when I do adjustment strategies on the trades. I will instead track these myself.

I have put much thought into these forecast game rules. When moving forward with the forecasts, I will refer back to these rules. They may change in the future.

Please check back in the following weeks for the first forecast.

May the games begin!