Distillate Glut Pushes Oil Lower
Fundamentals
Crude Oil futures are lower this morning, following a drop of over two and a half dollars on Friday due to oversupply concerns. Distillate supplies are at their highest levels in 26 years ahead of fall and winter when Heating Oil demand rises. If we have a mild winter in the Northeast, this could result in distillate stocks rising even further. There is also concern that Gasoline demand may begin to taper off now that the peak driving season is over, which may create a glut of motor fuel. Demand side concerns seem to have driven trading last week and spilled over into this week. Consumer spending remains a major concern for analysts covering the economy and energies. Without a significant increase in spending by consumers, there is a very good chance that the recovery the US and much of the world has seen in recent months may stall or reverse course and result in a double dip recession. This has left many traders wondering if prices rose too quickly relative to economic conditions and supplies. Also, speculative long positions rose last week despite the sharp drop in prices on Friday. The CFTC's Commitment of Traders report can be seen as an overbought/oversold indicator. The net long position is not great enough to be considered overbought, yet traders may wish to keep an eye on this number, as it could be seen as a leading indicator. Overall, fundamentally, the Crude Oil market seems to have a bearish tilt at the moment. Despite the bearish fundamentals, traders may want to closely watch the movement of the US Dollar, as it will likely have an impact on commodity prices in general, and could prop-up prices of commodities that do not have strong fundamentals.
Trading Ideas
Given the negative shift in fundamentals and somewhat shaky technicals, some traders may wish to enter into a bearish position. Those desiring to enter the futures market may find it wise to wait for a confirmation of the triple-top pattern before initiating a position. Option traders, however, may possibly wish to enter into a bear put spread because of the limited risk involved. Since the October options expire in three days, some traders may perhaps be better suited to enter into November options instead. Bearish traders can purchase a November Crude Oil 67 put and sell a November 64 put for a debit of 1.00. The cost and risk of the trade are $1,000, while the maximum profit is 2.00, or $2,000.
Technicals
The October Crude Oil chart seems to be forming a triple-top formation, which has yet to be confirmed by a solid close below 67.42. Like any other technical pattern, traders may wish to wait for confirmation before acting on it. The October contract is also nearing the 100-day moving average. The past few times the market has flirted with the average, the Oil market has found support. A significant close below the average could signal the beginning of an extended period of stagnation in prices, or possibly, the beginning of a new downtrend. Currently, the RSI indicator is nearing oversold levels, suggesting the market may find some near-term support. It is interesting to note that the moemtum indicator has held up fairly well, despite the sharp drop on Friday, which also suggests near-term strength.
Rob Kurzatkowsi, Senior Commodity Analyst
