Oil’s Rise to Two-Year Highs
Trading Ideas
Now that Oil prices are trading at 2-year highs and strong chart support is seen at $80.00, some traders may wish to explore selling puts in Crude Oil futures options with strike prices below support levels. For example, with February Crude Oil trading at 89.60 as of this writing, the February Oil 79.00 puts could be sold for about 0.70 points, or $700 per option, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized if February Oil futures are trading above 79.00 at option expiration in January. Given the risk involved in selling naked options, some traders may wish to exit the trade before expiration should February Oil futures close below 80.00.
Fundamentals
Crude Oil futures traders must feel like they are on a roller coaster, with prices rising and falling several dollars per barrel every couple of weeks. However, a look at the larger trend appears to indicate that lead month futures may have found a strong base just above $80 per barrel, and that the overall trend now seems to be made up of higher highs and higher lows. This past Friday’s trade was a perfect example of the current underlying strength in Oil, as an early morning sell-off tied to a much weaker than expected U.S. Non-Farms Payroll report for November was quickly erased as traders started to focus on global oil supplies, which are finally showing signs of declining, as well as a weaker U.S. Dollar, which is viewed as bullish for commodity prices. In addition, the term structure in Brent Crude Oil futures is starting to flatten, and in some cases moving towards a backwardation, where near-term futures trade at a premium to farther out contact months. This change in term structure may signal increased demand for Oil in the near-term and would likely be supportive of prices.
Technical Notes
Looking at the daily chart for January Crude Oil, we notice that since September of this year, Oil prices have higher lows and higher highs despite several downward corrections along the way. If we were to look at a front-month continuation chart, we would be trading at 2-year highs. The 14-day RSI looks strong, with a current reading of 64.65. The next major resistance point is seen at the 90.00 level, with support found at the November 23rd low of 80.28.
Mike Zarembski, Senior Commodity Analyst
