On the Road to Nowhere
Fundamentals
It seems neither bulls nor bears can take control of the Crude Oil futures market, as prices seem destined to remain range-bound for the near future. Traders seem to be confused by the conflicting data presented in economic reports on whether we are really seeing a recovery in the world economy. In addition, there are many opinions regarding why Oil prices are holding above $70 per barrel, given the record or near record inventories here in the US of Crude and refined products. It appears that there is still sufficient demand from investors for commodities as an asset class, which seems to be keeping a bullish bias in Oil prices. The most recent EIA energy stocks report showed a modest drop in Oil inventories last week, primarily due to sharply lower imports. With refineries in the process of shutting down for seasonal maintenance, we likely should expect lower utilization in the next few weeks, which should also damper demand for Oil by actual end-users. However, the wide contango (deferred futures months trading at a premium to nearby futures months) in the WTI oil futures is once again reviving interest in "carry trades" in the Oil market, where those able to finance and store Crude can sell deferred futures and "lock-in" a reasonable return. This "investment" demand is partially holding Oil prices steady, as "traders" help to take up some of the demand for Oil that actual users of the product currently do not need.
Trading Ideas
With the Oil market still stuck in its trading range pattern, some traders may wish to explore trading strategies that will benefit should the market continue to hold within its recent price range. One example of such a strategy would be the sale of a strangle in Crude Oil options, with the strike price just outside of the recent price range. For example, with November Crude Oil trading at 77.37 as of this writing, one could sell the November 87 calls as well as November 67 puts for a combined premium of 0.71 points, or $710 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in October should November Crude Oil settle below 87.00 and above 67.00. Given the risk involved in selling naked options, traders should have an exit strategy in place in case the position moves against them. One such strategy would be to buy back the strangle before expiration should November Crude Oil close above the call strake or below the put strike.
Technicals
Looking at the daily chart for November Crude, we notice prices moving sharply higher on Friday, with an attempt at testing near-term resistance at 77.82 on word of the Enbridge pipeline leak in Romeoville, Illinois on Thursday, which could cause short-term supply disruptions. However, oil supplies remain ample, and any test of resistance at 77.82 could be met with fresh selling -- especially once Oil movement resumes through the pipeline. Although recent strength has pushed prices above short-term moving averages, the longer-term 200-day moving average still looms nearly $4 above current price levels. Near-term support is found at the 20-day moving average near the 75.45 area.
Mike Zarembski, Senior Commodity Analyst
