Light, Sweet Crude Starts Quarter on Sour Note
Fundamentals
Crude Oil futures are lower this morning on a stronger US dollar and weakness in equity futures. The price of Oil has been centering in on the $70 a barrel mark for the past month, unable to find an intermediate direction. Investment demand, political instability in Iran and Nigeria, and tightening supplies have all been giving the market support, but economic factors have reigned-in rallies. Investors have begun to question the meteoric rise in prices since the first quarter of the year, as investors have become skeptical of a US economic recovery. It is difficult to see the price of Oil maintaining its upward momentum simply based on the supply, as demand has been lackluster for the most part. Consumers have shown their displeasure with rising fuel prices at the pump, showing that Gasoline consumption is far more elastic in the current economic climate than previously thought.
Yesterday's EIA inventory data disappointed the bull camp by showing a much smaller drawdown in inventory levels than Tuesday's API report had suggested. Inventory levels continue to drop and currently stand at 350.2 million barrels. This figure is still above seasonal norms, which fall between 305-345 million barrels for this time of the year. The Oil supply situation has gone from being very oversupplied to being very well supplied. Gasoline inventories have been moving in the opposite direction in recent weeks, rising 9.6 million barrels for the month. This suggests that the increased Gasoline production by refiners has been trimming down Crude Oil inventories, but consumer demand has failed to keep pace. If this pattern continues, it could weigh on Crude Oil prices.
Economic data has not been as rosy as in previous months. Yesterday's ADP job number showed a larger contraction in the labor market than previously thought, which sets the table for a possibly disappointing non-farm payroll report today. This hints at a jobless recovery that could adversely impact petroleum demand. Mortgage applications and construction spending have fallen-off as well, which may impact consumer spending. Housing market data suggests that we may not see a sharp recovery, but rather, stabilization in housing prices. With the recovery in housing stalling, consumer confidence has fallen sharply this month. Crude Oil bulls may find solace in Chinese economic data, which shows manufacturing and industrial production recovering. This, however, may not be enough to prevent a pullback in prices.
Trading Ideas
Some traders wishing to take advantage of weakening fundamentals and technicals may possibly want to consider entering into a bearish option strategy, such as a bear put spread. An example of such a strategy would be buying an August 67 put (CLQ967P) and selling an August 65 put (CLQ965P) for a debit of 0.70, or $700. The strategy would risk the initial investment for a maximum profit of 1.30, or $1,300, if the August contract closes below 65.00 at expiration.
Technicals
Turning to the chart, the August Crude Oil contract continues to show consolidation near the 70.00 mark. The chart suggests that the market may be susceptible to selling pressure on closes below the 67.00 mark, which would confirm a double-top formation on the daily chart. If the pattern is confirmed, the next solid area of support falls between 58.00 and 60.00. After centering on the 20-day moving average, prices have closed below the average for two consecutive sessions, suggesting that a near-term high may be in place. The momentum indicator has crossed below the zero line in overnight trading. If this holds up, it would be the first time the indicator has given a negative reading in two months, which can be seen as bearish.
Rob Kurzatkowski, Senior Commodity Analyst
