FOMC, Supply Weighs on Crude
Fundamentals
Crude Oil futures fell sharply on an unexpected build in supplies and a bearish statement from the FOMC. The Fed had mentioned that financial conditions have softened due to the European debt crisis, creating an environment that is not conducive to growth. The statement can be seen as bearish for equities and commodities, while supporting the US Dollar as a defensive play. Crude inventories bucked the seasonal trend and rose more than 2 million barrels ,versus expectations of a drawdown of 800,000 barrels. The International Energy Administration (IEA) lowered its demand forecast, citing lower demand from China. China's insatiable appetite for petroleum has been a key force in driving Crude prices higher since the early 2000's. Slower demand growth from the Asian giant could further bolster supplies, creating an oversupplied market. It certainly appears as though these developments have taken the wind out of the bull camp's sails. Traders will continue to question the demand component of the supply and demand equation, as OPEC will likely keep supplies steady for the foreseeable future. This could make it difficult for the Oil market to pick up any steam.
Trading Ideas
The economic landscape is not very supportive of Crude Oil -- or any commodity for that matter. Europe still needs to sort out their financial mess for traders to have any confidence in the Eurozone and global economy. The chart also shows that traders are reluctant to drive prices above the high $70's. For these reasons, some traders may wish consider a bear put spread, buying the August 74 put (CLQ074P) and selling the August 72 put (CLQ072P) for a debit of 0.55, or $550. The trade risks the initial cost for a potential profit of $1,450 if the August contract closes below 72.00 on the July 15th expiration.
Technicals
Turning to the chart, we see the continuation chart form two successive spinning top candlesticks, followed by yesterday's large down candle. This can likely be seen as bearish in the near-term. The first candle tested resistance at the $80 level, only to fail. Prices were also unable to cross above the 100-day moving average. The 20-day moving average happens to coincide with support at the $75 level. A violation of the average and minor support here could indicate that a near-term high is in place and may also result in a test of support near the $70 level.
Robert Kurzatkowski, Trading Specialist
