The situation in Egypt presents an interesting situation for traders. Trading news events can be a very high-risk proposition. For this reason, some traders may wish to take on a trade with predefined risk – for example, buying a March Crude Oil 92 call and selling a March 94 call for a debit of 0.85, or $850. The trade risks the initial cost for a possible maximum profit of $1,150.
Crude Oil futures have surged over the past two sessions, largely due to the unrest in Egypt. The nation itself produces very little Crude Oil, but the nation's Suez Canal is a major transportation route linking the Middle East to Europe. A shutdown of the canal could disrupt the transport of several million barrels of Oil per day. Currently, ships are running through the waterway at a normal rate, and OPEC has stated that the cartel will up production in the event of shortages. Like any geopolitical situation, it is difficult to tell when the conflict will end and the incumbent control of the military tends to prolong such situations. Many political observers are also concerned that turmoil could spread east to Saudi Arabia and other Gulf Oil producers. Even in the even that tensions subside and a peaceful resolution is reached, there is no guarantee that the price of petroleum will pull back sharply. Consumer spending in the US was at its highest pace in four years, a strong positive indicator for the US economy. This comes on the heels of a favorable GDP report. Also, the relationship between West Texas Intermediate (WTI) and Brent Crude Oil is narrowing. It looks as though Brent is trying to pull WTI up to its level.
Turning to the chart, we see the price of the March Crude Oil contract closing at new contract highs. Prices seem to be poised to test the 100-day moving average, but the market bounced before prices were able to touch the average. The move higher may have also invalidated the double-top formation confirmed last week. The next area of resistance may be found near 94.50, but this can be seen as a relatively minor resistance level. Stout resistance may be found near the 100 level.
Rob Kurzatkowski, Senior Commodity Analyst