Crude Quiet
Today's Idea
Crude Oil demand fundamentals have been and remain lackluster at best. However, Crude Oil traders tend not to look at the present, but rather the future. The lack of follow-through buying could be attributed to overbought technical conditions and Gold, which is at new highs, stealing a bit of Oil's thunder. If and when a new breakout might occur remains a mystery. For this reason, some traders may want to consider selling a put option, which is a neutral to bullish strategy. For example, selling a May 104.50 put at 0.45, or $450. The trade carries with it fairly significant option requirements and risk, so traders may want to consider exiting the trade on a close below 104.75 to mitigate some of that risk.
Fundamentals
Crude Oil futures have seen very choppy trading over the past several sessions, on fears that rising prices may quash demand in China and the US. China has raised the price of fuel due to rising costs. The move is unpopular domestically and looks bad for the government, which is attempting to curb inflation. Raising costs may actually be the best way for China to curb domestic demand and inflation, but would be a very unpopular move. The interest hike by the PBOC has been seen as far too little, far too late to make a significant impact on commodity demand. In the US, the employment situation is beginning to improve, which could be seen as a positive force for Oil prices. However, if fuel prices rise too quickly, the recovery could be quickly derailed. Driving season is just around the corner, which in and of itself is a driver of gasoline prices. The situation in Libya is little changed since the air strikes commenced, and many traders have largely ignored the developments there, instead focusing on Saudi Arabia. Protests in Crude Oil producing nations have quieted down over the past few days, but the prospect of turmoil causing a spike in prices is always there. Unlike equities, which typically only see panic selling, commodities can see panic buying. This is what could happen should Saudi Arabia boil over.
Technical Notes
Turning to the chart, we see sideways trading since the breakout above the 105.75 level. Some traders may view this as a consolidation pattern, barring a close back down below 105.75. The RSI remains at overbought levels, which could help explain the lack of further buying pressure. Momentum and RSI are beginning to show some bullish divergence, which hints at possible further upside.
Rob Kurzatkowski, Senior Commodity Analyst
