Is Oil's Upside Breakout for Real?
Fundamentals
After weeks of remaining in a relatively tight trading range, Oil futures have finally broken out to the upside, trading at 2-year highs for the front month futures, following the announcement by the Federal Reserve of $600 billion of treasury purchases over the next several months in its second round of quantitative easing. This news sent the Dollar sharply lower, which spurred traders into a commodity buying frenzy across nearly all sectors, as many trader's looked at the Fed's action as potentially inflationary in the coming months. Oil prices received some additional positive news from the non-farm payrolls report which showed a gain of 151,000 jobs in October, which is well above the 60,000 gain most traders were expected. OPEC last revised upward its global oil consumption forecast for 2014 by 800,000, as it anticipates a quicker pace to the global economic recovery. However, near-term the U.S. still has ample supplies of Crude, as the most recent EIA energy stock report showed U.S. Oil supplies rose by 1.95 million barrels last week, as lackluster demand for refined products caused refinery utilization to fall to 81.8%, vs. 84% last week. It appears that we will need to see continued increases in Oil demand from Asia, and especially China, in order to support Oil prices near $90 per barrel, as it may take some time for both the U.S. and European markets to regain their appetite for "black gold".
Trading Ideas
With Oil futures moving higher and out of its consolidation phase, some momentum traders may wish to explore bullish strategies using Oil futures options. An example of one such strategy would be buying a bull call spread. With January Oil futures trading at 87.22 as of this writing, one could buy the January Oil 90.00 call and sell the January Oil 95.00 call for about 1.34 points, or $1,340 per spread, not including commissions. The premium paid would be the maximum potential loss on the trade, with a potential profit of $5,000 minus the premium paid realized if January Oil is trading above 95.00 at option expiration in December.
Technicals
Looking at the daily chart for December Oil, we notice prices accelerating through resistance at 85.08, which finally put an end to the nearly 6-month long consolidation phase. The 20-day moving average has crossed above the 200-day moving average, which is also a bullish signal. The 14-day RSI is strong, with a current reading of 66.10. There is some minor resistance near the 88.60 area, but major resistance is seen at the psychologically important 90.00 area. Support is seen at the previous resistance of 85.08.
Mike Zarembski, Senior Commodity Analyst
