G-20 Sparks Oil Bulls, But Will the Excitement Last?
Fundamentals
The unity among the world's leaders at the G-20 conference has set a positive tone for the Crude Oil market. Traders are optimistic that the $1 trillion in emergency aid pledged will help emerging economies that were hit particularly hard during the downturn. The increase in money supply also figures to open the door to a more inflationary environment. Economic data has been much stronger recently, highlighted this week by a stronger ISM index, higher factory orders and construction spending, and an unexpected rise in pending home sales. While all of these indicators are stronger than analyst projections, they still reflect recessionary conditions and the economy still has great hurdles to jump before a large scale recovery is seen. Nonetheless, it is hard to fault traders for being optimistic after receiving a constant stream of dismal data for over a year. Fundamentally, Crude Oil continues to have a bearish slant, as inventories keep piling up in the face of weak demand, both from industry and the consumer. What we are seeing now is traders jockeying for position, not wanting to miss the bus if the economy does recover. Oil bulls expect OPEC to be late opening the spigots once the world economy does get back on track, which may create supply shortfalls in the future. Time will tell if these traders were premature in their assessment. The demand side of the equation is a huge unknown for traders. The unemployment rate tends to lag behind other economic indicators, and we may find ourselves in a situation where data shows a recovery, but unemployment remains high, stifling energy demand. Today's Non-Farm Payroll data from the government is expected to show the economy losing 650,000 jobs in March and the unemployment rate climbing to 8.5 percent. Given the dismal report by ADP earlier this week, it would not be surprising to see a loss of 685,000 jobs and an unemployment rate of 8.6 percent. Better than expected figures could cause the market to continue rallying into the weekend, while a larger than expected drop in jobs could cause prices to reverse course and sell-off.
Given the extreme volatility of the market and its fickle nature, bullish traders may want to confirm an upside breakout above the 56 level, along with an upward crossover of the 50 and 100-day moving averages before taking action. Some traders may want to consider entering a bull call spread, buying the June Crude 60 call and selling the June 65 call at a debit of 1.60. The trader risks the initial investment of $1,600 for a maximum profit potential of $3,400 if the underlying contract closes above $65.00 on the May 15th expiration date. More cautious traders may want to consider selling the spread early for a 3.20 credit, which would translate to a profit of $1,600, before commissions.
Technicals
The June Crude Oil chart shows the market mired in a sideways channel, unable to find a longer-term direction. Yesterday's sharp move higher can in part be attributed to technical factors, as the market came down to the short-term uptrend line and formed a bullish hammer. Technicals set the positive tone for the rally, while the fundamental news added fuel to the fire. The 56.00 level is the next resistance for the June contract. If the market is unable to breach this price level, June Crude risks forming a double top on the daily chart. The 50.00 level shows stout support, but if this level is violated to the downside, it could be seen as catastrophic for the bull camp. Not only would it be a violation of chart support, but this would also confirm a double top and violate psychological support. Momentum has remained fairly flat, despite yesterday's sharp rally, indicating the market may not be ready to cross the 56.00 mark.
Rob Kurzatkowski, Senior Commodity Analyst
