Fundamentals Take a Back Seat as Oil Prices Hover Near $80
Fundamentals
Oil prices remain resilient, hovering near $80 per barrel, despite less than stellar fundamentals. Some of the recent gains in Oil were attributed to a refinery workers' strike in France, which sparked a run-up in Gasoline prices. Oddly, a refinery shutdown may actually be bearish for Oil prices vs. refined products, as Oil demand decreases due to the refinery shutdown. In the U.S., low refinery margins have refineries operating at levels well below capacity, curbing Oil demand from actual users of the product. Despite lower refining output, U.S. gasoline supplies remain more than ample. Traders are looking for U.S. gasoline supplies to have increased by between 500,000 and 1 million barrels last week when the Energy Information Administration (EIA) releases their weekly energy stocks report. The increase is expected despite expectations of lower gasoline imports last week due to the strike in France. Crude Oil inventories are also expected to show an increase of nearly 2 million barrels. Not even a rising U.S. Dollar, especially vs. the Euro, could derail the recent up-move. So what is behind Crude's strength? Looking at the most recent commitment of traders report, we notice large non-commercial traders (traditionally commodity funds and large speculative accounts) increased their net long positions by nearly 19,000 contracts for the week ending February 16th. This increase was before the last upsurge to $80 in the April contract. These traders tend to be more technical or trend-following in nature, and will add to winning long positions as prices move higher. Non-reportable positions (small speculators) decreased last week, as small traders continued to abandon their net-short positions as oil prices rose. So it appears that technical considerations, not fundamentals, are in vogue in the Oil markets lately, and until proven incorrect, large speculators will want to continue to add to their long positions as long as the up-trend remains in place and their statement balances increase.
Trading Ideas
Given the Oil market's seeming ignorance to bearish fundamentals, it may be difficult to fight the trend and take a short position in Oil. By using options on Oil futures, however, a trader is able to establish a bearish position in Oil with a predefined risk that may allow one to ride out any short-term up-move without the fear of potentially unlimited risk. One such strategy would be selling bear call spreads in Oil options. An example would be selling the April Crude Oil 85 calls and buying the April Crude Oil 90 calls. With April Crude trading at 78.51 as of this writing, the spread could be done at a credit of 0.35, or $350 per spread, not including commissions. The premium received is the maximum potential gain on the trade and would be realized if April Crude Oil is trading below 85.00 at the option expiration in March. The maximum loss would be $5,000 minus the premium received if April Oil is trading above $90.00 at option expiration. Given this potential risk, some traders may wish to minimize the risk by closing out the trade early if April Oil trades above resistance at 85.00 before the options expire.
Technicals
Looking at the daily chart for April Crude Oil, we notice a "Doji" appeared on the daily chart, marking what appears to be a top in the latest up-move. This candlestick chart indicator can be a sign that the current trend has run its course, as the market has entered a period of equilibrium where neither bulls nor bears have control. Although prices remain above both the 20 and 100-day moving averages, yesterday 's sell-off did take prices below the 100-day MA , which may spark long liquidation selling should we close below this widely-watched technical indicator. The 14-day RSI has turned lower, moving to a more neutral reading of 55.59. Monday's high of 80.78 appears to be near-term resistance for the April contract, with major resistance seen at the January 11th high of 84.96. Near-term support is seen at the 20-day moving average, currently near the 75.80 area, with major support seen at the February 5th low of 69.80.
Mike Zarembski, Senior Commodity Analyst
