After Sell-off Focus on Margin Requirements, China Data: Oil Survey

What's next after last week's brutal sell-off? Will more speculators be flushed out of the market - particularly after the CME slapped 25 percent margin increases on U.S. oil futures late Monday - or can the market shrug off the bad news and find a more stable footing if the economic data stays strong?


As of now, prices have recovered but there's no shortage of potential negative risk events this week. Crude oil rose above $102/barrel in New York on Monday, rebounding from the biggest weekly decline since 2008, on signals that the global economic recovery remains on track.

U.S. payrolls expanded by 244,000 last month, the biggest gain since May 2010, after a revised 221,000 increase the prior month, according to the Labor Department.

"I think you need to be bullish in the week ahead," said Matthew Grossman, chief equity market strategist, Adam Mesh Trading Group, on Friday. "The stock market is showing resilience due to the jobs number today and I think oil and commodities have dropped too far too fast."

But crude oil futures fell more than $1/barrel after Monday's settlement as traders reaped profits from crude's rebound and reacted to new margin requirements. The CMEGroup, parent of the Chicago Board of Trade, said on Monday it would raise margin requirements to trade West Texas Intermediate, Brent, heating oil, RBOB gasoline futures. WTImargins will go up 25 percent on Tuesday.

Analysts were divided on the impact of the CME's action. Reacting to the news on Tuesday morning's edition of Squawk Box, John Kilduff, Founding Partner of Again Capital LLC, described the margin increases as a "speculation killer" while Cumberland Advisors' Chairman & Chief Investment Officer David Kotok said it was a "game-changer" for the commodities market as it introduced a new level of regulatory risk.

A number of CNBC viewers also weighed in with their opinions. Sanjeev Sivalingam said the CME measures should have been implemented much earlier and "hand in hand with the U.S. Quantitative Easing program in order to help reduce the amount of cheap money chasing after commodities."

But Aaron Smith in Chicago said position limits rather than higher margins were the best way to reduce the number of speculators versus hedgers in the market.

"Raising margins just shakes-out the small single contract players i.e. myself and causes bigger multi-contract players to add funds to their accounts or reduce their positions," Smith explained. "Raising margins also kills trading volume, which kills exchange revenues."

China Data Watch

This week also features a slew of China's monthly economic data release with PPI, CPI, industrial production, retail sales, fixed asset investment, and international trade statistics due out from the world's second-largest economy.

Key CPI inflation data may show that inflation in April eased from a 32-month high due to a slight decline in food prices, Reuters reported. A higher than expected reading will revive expectations of more policy tightening from Beijing, dealing a further blow to beaten-down commodities and currencies such as the Aussie.

Last week, the Reuters-Jefferies CRB Index, a global benchmark for commodities prices staged its biggest weekly drop since late 2008.

"All eyes will be watching on the Chinese data dump," said Serene Lim, a commodities analyst with ANZ Bank in Singapore. Prices "look directionally bearish" for this week, she said.

From a technical perspective, Daryl Guppy, CEO,, said the short-term trend for this week is bearish. U.S. crude futures may find support at around $96 a barrel. Expect "short term rebound rallies and continuation of long term uptrend," he said.

Uptrend Intact?

Consensus opinion after last week's fall suggests the longer-run bull cycle is still intact. That said, Andre Julian, senior market strategist at OpVest Wealth Management, said the severity of the sell-off shocked many in the market and will make for a volatile month this May.

"The correction in the oil market was something that many traders have been expecting, but not at the level at which it occurred," Julian said. "The massive sell-off will no doubt affect leveraged buyers of oil, such as those who are in futures. Oil futures should continue to be volatile through May because it is typically a weak month for demand as it is the transition month between winter and summer fuel usage."

Tactically, Julian recommends investors to hedge by purchasing put options or options spreads in the crude market "if they are concerned with near term risk." Those in leveraged funds hopefully already had stops or hedges in place, he said.

"Playing both sides of the market through options straddles is in order for new entries into the market because it may sell off a bit before it finds support and reverses back up," he added. "Using this strategy is a great way to catch both sides of the market movement, especially during times of expected volatility and movement."