Stuck in a Rut!
Fundamentals
This phrase can best describe the Crude Oil futures market during the past several weeks, as lead month prices appear to be firmly trapped between $70 and $80 per barrel. The current supply of Oil remains adequate -- especially given the relatively weak demand seen from western nations, as the economic recovery has been lackluster. However, refinery operation rates have improved during the past few weeks, with the most recent Energy Information Administration (EIA) Energy Stock report showing U.S, refiners were operating at 90.5%, which is the highest weekly operating rate since January of 2008. Ironically, as the output of refined products has been increasing, demand for both gasoline and distillates has not kept pace. This past week, the EIA reported that gasoline demand last week fell by 369,000 barrels per day (B/D) to 9.08 million B/D, and distillate demand fell by 422,000 B/D to 3.527 million B/D. The lackluster demand for refined products could hurt Oil prices, especially if refinery profit margins contract, causing end users (refineries) to begin to curtail operations and lessening physical Oil demand. The Oil production story is also a mixed bag, with U.S. Oil production in the Gulf of Mexico on hold, but production out of OPEC producing countries higher than stated quota levels. So until we see a major catalyst influence the oil market -- either bullish or bearish -- we could see prices remain range-bound in the near-term.
Trading Ideas
With the Crude Oil market remaining range-bound, some traders may wish to investigate trading strategies that could benefit from a sideways market. An example of such a trade would be selling strangles (selling an out of the money call as well as selling an out of the money put in the same contract month). For example, a trader could sell a September Crude Oil 88.00 call and at the same time sell a September crude oil 65.00 put. With September Crude Oil trading at 78.00 as of this writing, this strangle could be sold for about 0.52, or $520 per spread, not including commissions. The premium received would be the maximum potential profit on the trade, which would be realized should September Crude be trading above 65.00 and below 88.00 at option expiration in August. Given the potential risk involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such strategy might be closing out the trade before expiration should September Crude Oil trade above 88.00 or below 65.00.
Technicals
Looking at the daily chart for September Crude Oil, we notice mixed technical signals, with prices holding above the short-term 20-day moving average, but remaining below the widely watched 200-day moving average. Since the end of the $20-plus selloff in late May, prices have moved in a relatively narrow $11 price range, bounded by major support at the May 25th low of 69.62, and major resistance at the June 21st high of 80.82. The 14-day RSI has moved back into neutral territory, with a current reading of 54.16.
Mike Zarembski, Senior Commodity Analyst
