Will the U.S. Remain Well Oiled?
Fundamentals
Crude Oil futures have been choppy lately, as mixed fundamentals have traders reluctant to lean in either direction. In the bearish camp we have continued concerns that the global economic recovery will be slowed by the continued fallout from the European debt crisis, which would be a negative for energy demand as industrial and consumer users curtail their energy usage. In addition, U.S. Crude Oil inventories are ample, with storage space becoming a concern -- especially in Cushing, Oklahoma, which is the delivery point for the NYMEX futures contract. OPEC is expected to have produced 70,000 barrels per day less than anticipated last month due to the current supply situation. On the bullish side, the U.S. Energy Department, in its Short-term Energy Outlook, expects U.S. oil production from the Gulf of Mexico to decline by just over 6% due to the government's decision to put a moratorium in place on deep water drilling. Also supportive are expectations that Chinese exports are running well above last year's totals, which is leading some traders to believe that the Asian juggernaut will still show rapid economic growth, despite Chinese government attempts to put the brakes on its robust growth rate. The most recent weekly EIA energy stock report showed that refinery operation rates increased to 89.1% last week, which caused weekly Crude Oil inventories to decline for the second consecutive week. If this trend continues, we could start to see U.S. Oil inventories begin to decline. Ultimately, the next move in Oil prices may come down to the mentality of market participants, as continued fears of a global slowdown could spur further "flight to liquidity" selling in the energy complex , while positive economic data out of the U.S. and Asia could spur renewed buying as traders re-access their economic growth forecasts upward.
Trading Ideas
Given the range-bound trading action seen in Oil the past couple of weeks, due to mixed fundamental data, some traders may wish to investigate a trading strategy that will position them to take advantage of a large directional move should oil futures move out of the eight-dollar or so recent price range. One such trading strategy could be the purchase of a strangle in Oil futures options. An example of this trade would be buying an August Crude 80 call and buying an August Crude 68 put. With August Crude trading at 75.60 as of this writing, this strangle could be purchased for about 2.90 points, or $2900 per spread, not including commissions. The premium received would be the maximum risk on the trade, with the trade profitable at expiration in July if August Crude is trading above 82.90 or below 65.10.
Technicals
Looking at the daily chart for July Oil, we notice prices breaking through resistance at the May 28th high of 75.72. A close above this point could set-up a test of the 77.75 area. The 14-day RSI has recovered nicely from oversold levels, with a current reading of 50.72. Although prices are now above the 20-day moving average, long-term Oil bulls would need to see a close above the 100-day moving average, currently near the 80.00 area, to definitely establish control. Should the attempted breakout through resistance fail to hold, we could see a potential test of the June 7th low near 69.50.
Mike Zarembski Senior Commodity Analyst
