Oil Prices Continue to Gush Higher!
Fundamentals
U.S. Crude Oil futures continue to defy bearish domestic fundamentals, as traders have turned their attention to the Far East where Oil demand is expected to increase. The CLSA China Purchasing Managers Index rose to 52.8 in July, which was the highest reading in the past 12-months. Readings above 50 signal an expansion in manufacturing by the second largest Oil consuming nation, which should offset the continued lackluster Oil demand by the U.S. and European nations. This was not the only bullish news for Oil out of China, with reports that Chinese refiners ramped-up production to near record rates in June, which lowered Chinese Oil inventories by 1.1 million metric tons. Back in the U.S., today's ISM Factory Index readings for July came in above expectations at 48.9, but they are still below the 50 reading needed to show expansion. The lead month September Crude Oil contract has rallied nearly $10 per barrel since last Wednesday, after the EIA reported a much larger than expected 5.1 million barrel expansion in U.S. Crude inventories last week. Though most of the headlines will target rising Chinese demand for the Oil price run-up, it may be the continued weakening of the U.S. Dollar that is behind the rise in not only Oil prices, but commodities in general -- especially as investors start to believe that rising inflation is destined to appear sooner rather than later due to the massive global economic stimuli we have seen this year and begin to move some of their assets into inflation hedges such as Oil and Gold.
Trading Ideas
The sharp run-up in oil prices the past several sessions appears to have sparked an increase in Oil options volatility. Some traders looking to take advantage of this increase may possibly want to look into option selling strategies. An example of one such trade would be selling strangles in Crude Oil futures options. For instance, selling the September 80 calls and the September 60 puts. With September Oil trading at 71.54 as of this writing, the strangle could be sold for 0.50 points, or $500 per strangle before commissions. September options expire in 2 weeks, and time decay will most likely help the short strangle position. Given the potential unlimited risk involved in this strategy, risk management is paramount for successful short options trading. Traders will probably want to consider closing out the trade if September Oil is trading at or above $80 or at or below $60 before the option expiration on August 17th.
Technicals
Turning to the daily chart for September Crude Oil, we notice how the 100-day moving average has curtailed any price corrections of late. The rapid move upward also occurred on higher than average volume, which may be due to window-dressing buying by commodity funds at the end of July. The 14-day RSI looks strong, with a current reading of 61.96. Should the September contract fail to take out its yearly highs of 74.66, a period of price consolidation may be likely, with prices holding within a 5 to 6-dollar range the next few weeks. Support for September Oil is seen at the 100-day moving average, currently at 62.45, with resistance found at the June 30th highs of 74.25.
Mike Zarembski, Senior Commodity Analyst
