Oil prices increased following US President Donald Trump's latest tariff threat on countries importing Russian crude, with WTI seeing gains of 3% today on the news. Additionally, he tied the statement to the progress on a ceasefire agreement in Ukraine. However, skepticism among traders kept the rally in check, as many questioned whether the proposal would materialize into actual policy.
What else is behind these higher oil prices?
Crude oil prices have remained lackluster and out of the spotlight since September 2024, as the market has been range-bound between $65 and $80 per barrel.
Source: Barchart
Like many other commodity markets, crude oil is in a holding pattern, awaiting the outcome of the numerous tariffs imposed on global economies. Additionally, President Trump aims to reduce the country's dependence on foreign oil by increasing domestic oil production. Both the tariffs and energy independence will take time to examine and implement. Does that mean oil will not be tradable during this period? Not at all!
The market is in a broad trading range of about $15 per barrel. As the market approached the top of the channel in January 2025, supply entered the market, pushing the price to the recent lows of the channel, where demand was evident. Several factors support bullish oil prices from these levels. Let's review them.
Seasonal Pattern
Source: Moore Research Center, Inc. (MRCI)
Seasonally, oil prices have rallied from December until approximately the first week of May (blue line). The tariff and trade talks dampened this very reliable pattern this season. However, MRCI research has found a high probability of recurring micro-events in the crude oil market that may interest traders. MRCI has researched crude oil prices over the past 15 years and identified the upcoming seasonal pattern, which we will discuss. As they found a high occurrence rate with a seasonal pattern, they also identified one with little drawdown during the testing period. What good is a seasonal pattern if the drawdowns are excessive before the trade becomes profitable?
As a crucial reminder, while seasonal patterns can provide valuable insights, they should not be the basis for trading decisions. Traders must consider various technical and fundamental indicators, risk management strategies, and market conditions to make informed and balanced trading decisions.
MRCI has found that the August crude oil contract closed higher on April 14 than on March 31 for 14 of the past 15 years, a 93% occurrence rate. A catalyst supporting this year's seasonal pattern is the proximity of the current price to the bottom of a multi-month channel. In the upcoming paragraphs, I'll also discuss more bullish data for this trade.
Source: MRCI
MRCI's results table for the past 15 years discloses another bullish feature. The seasonal pattern has experienced a zero daily drawdown during 5 of the past 15 years.
The Commitment of Traders (COT) Report
Source: Barchart
The continuous weekly crude oil chart dates back to 2007. The blue line represents the net positions of Managed Money in the crude oil market. The red line represents their net positions; a value greater than zero indicates a net-long position and a value less than zero indicates a net-short position. The green line is 100,000, and the red line is zero. Over the past 18 years, when Managed Money's net long positions fell to or below the 100K net long position threshold, the crude oil market generated sufficient demand to rally, creating potential trading profit opportunities. Recently, their net long positions have dipped below the green line, while we have a 93% occurrence rate of a seasonal rally.
COT Report for Gross Positions
Source: CME Group Exchange
Examining the above chart, Managed Money has actively increased its long positions (blue bars) during the recent price rally (yellow line).
Source: CME Group Exchange
The graph above represents the gross long and short positions of the commercial traders in the oil market. Notice the blue bars (long positions) have remained higher than the red bars for the past year. There are two types of commercials in this category. Producers typically contract for short crude oil (red bars), while processors generally have long contracts (blue bars) to hedge risks. As refiners gear up for the summer driving season, it's not unusual to see the processors so bullish on crude oil.
Markets to participate in this opportunity
Futures market traders could trade the standard-size (CL) crude oil contract, the mini-crude oil contract (QM), or the micro-contract (CY). Equity traders may be interested in trading the USO exchange-traded fund.
In Closing…
As the crude oil market navigates a complex landscape of tariffs, geopolitical tensions, and seasonal trends, traders must stay informed and adaptable. With a historical 93% occurrence rate of a seasonal rally in mid-April, alongside Managed Money positioning at historically supportive levels, opportunities may emerge for those who understand the market's cyclical nature. Recognizing key technical and fundamental indicators can help you position yourself strategically, whether trading crude oil futures or ETFs like USO. The evolving geopolitical landscape, especially regarding US tariff policies and the war in Ukraine, will continue to influence price action, making vigilance and research critical for success.
Now is the time for traders to refine their strategies and exploit potential market movements. Review your risk management plan and stay informed about policy developments impacting crude oil prices. Reliable research sources such as MRCI and COT reports can help you make data-driven decisions. Whether you are an active short-term or swing trader seeking exposure to the energy market, the current conditions may present compelling opportunities.
