Petroleum Puzzle
Fundamentals
Renewed economic and banking fears sent equity and commodity prices tumbling yesterday. The amount of bad debt at Bank of America soared, causing a mass exodus in banking shares and sparking fears that the recent positive developments in the banking sector were only temporary. The International Monetary Fund (IMF) is expected to lower its economic outlook for 2009 when it releases its new forecast tomorrow. The IMF expects to see a recovery in 2010 contingent upon governments adopting sound economic policies, including further cleansing of banks' balance sheets, better economic oversight and supporting emerging markets that have fallen under pressure. Crude Oil traders will be watching how the equity markets and US dollar behave in the coming days to determine the market's intermediate direction. If yesterday is any indication, the market may find itself succumbing to selling pressure if traders' appetite for risk abates. While the equity markets may not sell-off with the fervor seen late last year and early this year, stagnation of equity prices could be seen as a negative influence on energy prices. Lack of investment opportunities could result in the greenback strengthening, as traders hedge risk. The International Energy Agency (IEA) does not expect OPEC to trim production in its May meeting, despite a more than adequately supplied market. The agency also reiterated its view that petroleum demand will not increase until 2010. Like the equity markets, energies may have gotten ahead of themselves, trying to ignore the 800 pound gorilla in the room in the form of a 59-day supply of Crude Oil in storage.
Trading Ideas
Given the negative shift in bias, aggressive traders might choose to consider entering a bearish strategy. Given the violet price swings in Crude Oil futures, more conservative traders may possibly be better suited by potentially entering a debit option spread by buying the June 46 put and selling the June 44 put for a debit of 0.70, or $700 per spread. This trade risks the initial investment for the possibility of a $1,300 return if the price of the underlying June contract closes below $44 a barrel on the May 15th expiration date.
Technicals
The June Crude Oil chart shows the market moving out of its recent consolidation. Yesterday's sharp sell-off confirmed a downside breakout from a triangle pattern on the daily chart, suggesting prices could move back below the $45 mark or beyond. Yesterday also marked the first close below the 50-day moving average in over a month, and the first close below the 100-day moving average this month -- which both can be seen as negative developments. Prices closed below support at 48.75, and the next significant chart support area would be the 45.08 level. The 20-day momentum indicator has fallen below the zero line for the first time since March 12th , adding to the negative near-term bias.
Rob Kurzatkowski, Senior Commodity Analyst
