Cold Snap has Brought Out the Oil Bulls
Fundamentals
Crude Oil has risen to 15-month highs on a failing greenback and cold weather, which could tighten Heating Oil supplies in the Northeast. Russia has also failed to reach an agreement with Belarus on Oil supplies, which could cut off Russian exports to continental Europe. This suggests supplies may tighten more quickly than previously anticipated. Dollar bulls hoping that the strength of the currency would follow through into 2010 have had their hopes dashed. The weaker than anticipated non-farm payroll number may actually be a mixed blessing for Crude Oil traders. On one hand, the employment situation in the US may not be improving as greatly as many had hoped, which could delay further economic improvement. This does not bode well for petroleum demand. On the other hand, the bleaker employment outlook may result in the Fed raising rates later than many traders had expected, which may cause the Dollar to come under further duress. Traders wishing to hedge inflation may use Crude Oil as their investment vehicle of choice, choosing to invest in a root cause of inflation rather that Gold, which is a beneficiary of inflation. The increase in speculator interest in Crude Oil could also result in prices moving too quickly to the upside, causing overbought conditions quickly.
Trading Ideas
The fundamental outlook for Crude Oil remains strong and will likely remain strong as long as the US Dollar is unable to gain traction. Technically, the breakout could be a sign that prices may be set to move higher and possibly test levels near $90. The market, though, does risk getting overheated from the fundamental and technical buying, which may make the market exposed to a possible violent correction. For this reason, some traders may wish to consider taking on a spread with limited exposure - for example, possibly purchasing a March Crude Oil 85 call (CLH085C) and selling a March 88 call (CLH088C) for a limit of 1.60 to the buy side. The trade risks the initial investment of $1,600 for a potential profit of $1,400 if the March contract closes above $88 at expiration.
Technicals
The March Crude Oil chart shows prices breaking out above near-term resistance at 80.50. The next significant area of resistance comes in at 88.28, a relative low close from December 2007. The 20-day moving average appears to be on the verge of crossing through the 50-day to the upside, which could be seen as bullish in the mid-term. The oscillators are showing that Crude Oil is becoming overbought, which could cause a pullback or consolidation due to profit-taking.
Rob Kurzatkowski, Senior Commodity Analyst
