Oil Prices Fail Again to Take Out $85 Resistance
Fundamentals
Sometimes it appears that Oil prices are determined to remain range-bound, as the recent test of upside resistance at 85.00 has been unsuccessful. This time it was a surprise move by the Peoples Bank of China (PBOC), which raised the 1-year lending rate by 25 basis points in an attempt to once again put the brakes on the country’s rampant growth. This move sent the U.S. Dollar soaring, adding credence to the “reversal” seen in the value of the greenback this past Friday. A rising Dollar is viewed as a negative to commodity prices, including Oil, and sent the entire complex into the red on Tuesday. Oil bulls were pinning their hopes on strong Oil demand from Asia, and in particular China, in order to help curb the global Oil surplus and keep prices robust. However, the latest interest rate hike by the PBOC is viewed as a message to the market that China is determined to keep growth prospects at sustainable levels, which has the potential to moderately slow the nation’s appetite for commodities. Not all the news is bearish, however, with the labor strike in France at its Fos-Lavera Oil terminal entering its 23rd day. This has disrupted the production at the nation’s refineries, which represent a significant chunk of Europe’s refining capacity. Many traders will also keep an eye on this morning’s release of the weekly EIA energy stocks report. Although Oil and product (Gasoline and Heating Oil) supplies have fallen in recent weeks, Oil inventories in the U.S. are still well above last year’s totals. Some analysts are looking for Oil inventories to have increased by about 2.4 million barrels last week, as U.S. refinery rates have fallen recently due to weak product margins.
Trading Ideas
Once again Oil prices look to remain range-bound, with strong resistance in the December futures near the 85.00 level and strong support just above 70.00. Some trades who are looking for this prices range to continue may wish to explore selling strangles in Crude Oil futures options with the call strike price above resistance at 85.00 and put strike price below support at 70.00. An example of this trade would be selling the December Oil 95.00 calls and selling the December Oil 68.00 puts. With the December futures trading at 81.49 as of this writing, this strangle could be sold for about 0.27 points, or $270 per strangle, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized should December Oil be trading below 95.00 or above 68.00 at option expiration in mid-November. Given the risk involved in selling naked options, traders should have an exit strategy in place should the trade move against them. One such strategy would be to close out the position prior to expiration should the combined option premium on the options sold trade at 2.5 times the premium received for selling the options originally.
Technicals
Looking at the daily chart for December Crude, we notice the failure once again for the market to close above resistance at 85.00. The 14-day RSI only briefly moved into overbought territory during the recent price run-up before falling sharply to a more neutral reading of 53.37. The failure to move prices through 85.00 also may have prevented the 20-day moving average from crossing above the 200-day moving average -- which would have been a bullish indicator for some technical traders. The next support level is seen at September 14th high of 79.75, with resistance found at the October 7th high of 85.08.
Mike Zarembski, Senior Commodity Analyst
