Oil Prices Rebound After Bullish EIA Energy Stocks Report
Fundamentals
It looks like traders (and OPEC Oil ministers) don't want to see Oil prices in the sixties, as the lead month January futures failed to spend much time below $70 this past week. Oil prices got a boost by a relatively bullish Energy Information Administration (EIA) weekly energy stock report. The report released on Wednesday showed that U.S. Oil stocks fell by 3.689 million barrels last week, or over double the average analyst's estimate of a 1.7 million barrel decline. Distillate inventories also declined sharply, falling by nearly 3 million barrels last week. Prices moved up sharply after the report was released, aided by options-related buying tied to options expiration in the January contract later that afternoon. However, looking into the details of the report, the headline figures start to lose some of their bullish luster, as refinery rates once again fell below 80%, as profit margins for U.S. refineries remain tight. Crude Imports fell by 365,000 barrels per day last week, signaling weak user demand. In addition, oil inventories in Cushing, Oklahoma (the delivery point for the NYMEX Crude Oil futures contract) rose by an additional 700,000 barrels last week, as some big market participants are finding it more profitable to store Crude Oil and sell deferred month futures than actually using the Crude for refining. Some of the recent price weakness in the Oil market the past several days has been tied to a resurgent U.S. Dollar, as concerns about credit downgrades in some members of the European Union as well as the credit issues in Dubai have brought a bid back into the greenback. A stronger U.S. Dollar has equated to lower commodity prices, and Oil is no exception, especially given the large net-long position being held by speculative accounts in the Oil market, which triggered a major bout of liquidation selling in Oil as the Dollar rose. The next major event for Oil traders is the December 22nd OPEC meeting being held in Luanda, Angola. However, as with the past few oil cartel meetings, no changes are expected in members' oil production quotas.
Trading Ideas
Signs of improving economic conditions in the U.S. coupled with Oil's unwillingness to stay below $70 per barrel could motivate some traders to investigate neutral to bullish option strategies in Crude Oil, such as selling puts in February Oil options. An example of such a trade might be selling the February Oil 65 puts. With February Crude trading at 74.57 as of this writing, the puts could be sold for 0.60, or $600 per option, not including commissions. The recent lows in February Crude come in at 66.82 (9/25/09 lows), so February Oil would have to fall below this major support point before there is any chance of the 65 puts moving to in the money. Since risk management is essential, especially when selling naked options, some traders may wish to possibly consider exiting the position before expiration in January should February Crude close below support at 66.82.
Technicals
Looking at the daily chart for February Crude going back the past 6 months, we notice Oil prices making a series of higher lows, starting with the July 13th lows of 63.61, to the September 25th lows of 66.82. After drawing a trendline connecting these major lows, we notice the latest Oil sell-off just missed testing the trendline, as prices rebounded the past few days. However, to turn the momentum back in favor of the bulls we would need a weekly close above the 100-day moving average currently near the 75.50 area. Momentum has turned neutral, with the 14-day RSI currently reading 44.45. Because we are seeing conflicting fundamentals in the Oil market, it may be likely that we will fall back into a trading range market for the remainder of 2009. Near-term support for February Crude is seen at 70.83, with near-term resistance found at 75.50.
Mike Zarembski, Senior Commodity Analyst
