Petroleum Puzzle
Fundamentals
Crude Oil finds itself in a precarious position because market observers expect the commodity to appreciate substantially over the long run, but near-term fundamentals cannot justify higher prices due to over-supply. The move higher from lows in February has been driven by traders vying for position in hopes that the recent improvement in economic indicators is not an aberration. While there are many unknowns facing the market, what traders do know is that the longer prices linger around the $50 mark or lower, the more explosive the increase in prices is expected to be down the road due to lower investment. Veteran fund manager Jim Rogers has made public comments indicating that he favors Crude Oil over Gold as an investment because he sees the IMF selling some of its holdings of the precious metal. The IMF is one of the largest holders of Gold and has pledged a good deal of aid in recent months, backing up Mr. Rogers' assessment. Eventually, the various stimulus packages enacted by governments around the world are going to increase inflationary pressure, which increases Crude Oil's appeal. Gold prices leveled off early in the second quarter of 2008, while Crude Oil prices continued to rally. Traders opted to hedge inflation directly by purchasing the commodity driving inflation rather than buying Gold, which increases in value as a result of inflation. When the economy gets back on track, this theme may repeat itself. Before we get too far ahead of ourselves, the current oversupply of Crude Oil may stymie rallies. The International Energy Agency (IEA) reaffirmed its position that Crude Oil demand will continue to falter through this year. The agency decreased its 2009 demand forecast once again and now expects global demand to fall to 83.4 million barrels a day, a decline of 2.4 million barrels a day versus 2008. In the US, the Energy Information Administration (EIA) reported that inventories are at their highest levels since the first year of the Clinton administration. The two forces pulling at the Crude Oil market make it difficult to gauge the direction of the market.
Aggressive Crude Oil traders that are neutral on market direction may choose to put on a short strangle position by selling the May 47 puts and the May 55 calls for a premium of 1.00, or $1,000 per spread. These options expire on April 16th , leaving only three days until expiration. Nonetheless, it is a fairly risky trade, since Crude Oil can make sizable moves, so traders considering this trade may also want to buy a May 46 put and May 56 call for a debit of 0.45, or $450, as insurance. Buying the insurance will reduce the profit potential of the short strangle, but will also reduce the maximum loss potential of the trade to $550. Without the long strangle as coverage, be forewarned that the trade has unlimited loss potential.
Technicals
The May Crude Oil chart shows prices consolidating after breaking prior resistance at 48.09. Prices have been trading in a sideways range between 47.50 and 54.50 for the past few weeks, indicating indecision among traders. Prices are hovering near the 100-day moving average, but have not been able to deviate from the average. The 50-day average has acted as support the last two times the market tested this downside level. The 50 and 100-day averages are coming close to converging, and an upward crossover could come soon. An upward crossover could be seen as bullish over the long-term and an indication that the market has reached a slow, grinding bottom.
Rob Kurzatkowski, Senior Commodity Analyst
