Oil Leak!
Today's Idea 6-20-2011
Those traders who are still bullish on Crude Oil may wish to use the current weakness in prices as an opportunity to explore selling out-of-the-money puts in Crude Oil futures options. For example, with August Crude Oil trading at 92.85 as of this writing, the August Crude 76 puts could be sold for about 0.25, or $250 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in mid-July should the August futures be trading above 76.00. Given the risks involved in selling naked options, traders may wish to close out their trades prior to expiration should the option premium trade at three times the amount received for originally selling the option.
Fundamentals
Oil futures have not been above the "risk-off" trade mentality seen recently, as traders concerns over the European debt crisis as well as signs of an economic slowdown in the US sparked long liquidation selling in WTI Oil futures this past week. Front month July Crude Oil broke through technical support at 95.00 per barrel, triggering sell stops below this key price point. The short-term outlook appears to be favoring the bears, as US Oil demand remains lackluster. Concerns that China plans to raise interest rates once again could slow Oil demand from the world's most populous nation. However, in the long run, Oil prices may still have room to move higher. The International Energy Agency warned that the additional Oil output from Saudi Arabia of 1 million barrels per day would not make up for the loss of Libyan Oil, which is higher quality and in demand by European refiners. The agency also expects Oil prices will continue to rise in the next 5-years, with continued increasing long-term demand from both China and India outpacing production and causing average Oil prices to rise by nearly $20 per barrel in the coming years. The IEA also warns of increasingly tight supplies of "lighter and sweeter" grades of Crude Oil in the coming months, mainly tied to the Libyan shutdown, but also due to lower production out of the North Sea and potential disruptions out of Nigeria, where political rebels have caused damage to the Oil infrastructure which has lowered the output if its highly prized "Bonny Light" Crude. A current tight supply of high grade Oil is a major reason why the "Brent" contract has traded at a huge premium to the US "benchmark" WTI contract along with the continued glut of Oil in the NYMEX delivery point in Cushing, Oklahoma. However, even in Cushing, we have started to see supplies being drawn down a bit, as the recent shutdown of the Keystone Pipeline from Canada had refineries with access to Oil from Cushing begin to drawdown inventories. So unless we see the global economy move back into a recessionary phase where global Oil demand decreased sharply, any major declines in Oil prices may turn out to be short-lived.
Technical Notes
Looking at the daily chart for August Crude Oil, we notice prices moving well below the 200-day moving average for the first time this year. The 14-day RSI is approaching oversold levels with a current reading of 33.94, as long liquidation selling due to fears of an economic slowdown keep pressure on prices. 90.00 is now seen as the next support level for August Crude, with resistance found at the 20-day moving average currently near the 99.50 area.
Mike Zarembski, Senior Commodity Analyst
