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Tuesday, Jun 27th

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Crude Oil


Our current trading signal for crude oil (ETFs: DBO, USO, and OIL; futures: CL) is BUY. We rely on a systematic approach to trade the commodity. Our statistical analysis studies the relationship between crude oil prices and the main drivers of the market, a relationship that we evaluate and use to make predictions. These drivers include global energy demand, productions, inventories, export and import volumes, investment flows, growth of crude oil ETF assets, degree of financial speculation, futures term structures, implied and realized volatility, volatility skews, sovereign spreads, and economic indicators of major developed and emerging market countries such as manufacturing surveys, consumer and business sentiments, employment levels, construction activities, orders and inventories, retail sales, inflation rates, and money supplies, as well as other elements that are fundamental to energy commodities. In developing the algorithm to translate supply/demand into oil price scenarios, we perform statistical analysis to draw on past relationships to project future trends and isolate important turning points in the crude oil market.

Based on a scale from 0 to 100, with 100 being the most bullish and 0 being the most bearish, our latest model reading for crude oil is 68.51. The average return of the trades is 51.67% and the annualized return of the trades is 27.97%. Measuring the risk-adjusted performance, the model has produced a Sharpe Ratio of 0.97, which is driven by the model's standard deviation of 28.83%. For comparison purpose, the Sharpe Ratio of the buy and hold strategy for crude oil is 0.04. The Sortino Ratio, which measures the relative returns of the model over its downside deviation of 16.60%, is at 1.29. The Calmar Ratio, which is the ratio of the average return over the maximum drawdown, is at 0.86. The calculation of the model for crude oil took 3.77 hours per CPU core to complete at our central computation workstations, which are a group of powerful computers that perform statistical computation continuously 24 hours day and 7 days a week to produce real-time trading signals for crude oil.

Our model indicates that fundamentals are likely to keep the market strong for the foreseeable future. As a result, we are comfortable taking on risk on crude oil. Our systematic framework is supportive of this positioning. The table below shows selected drivers that have significant recent updates. They are among the large macro database on which we perform statistical analysis to project future price trends and develop investment views. We do not rely only on any single factor to model our investments. Instead, the cross relationships of all the factors and time series are researched back over many market cycles in both periods of secular bullish and bearish trends. The goal of our algorithm is to identify profitable buy and sell opportunities and optimize the risk/return profile for crude oil.

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