Pipeline Shutdown Trumps Weak Economic Data as Oil Prices Hold Above $100
Today's Idea
A look at the daily chart for July Crude Oil shows continued support for prices near the 95.00 area. Some traders bullish on Oil or at least neutral as to the direction of prices may wish to explore selling puts on Crude Oil futures options with strike prices below the 95.00 support level. For example, with the July Crude Oil futures trading at 102.87 as of this writing, the July 90.00 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-June should the July Oil futures be trading above 90.00. Given the risks involved in selling naked options, some traders may wish to close out the trade prior to expiration should July Crude close below support at 95.00.
Fundamentals
Crude Oil futures continue to rebound from the commodity complex liquidation of early May, and should start the month of June back above the $100 per barrel level. The recent price recovery can be attributed to a weaker US Dollar, as well as continued political unrest in the Middle East. However, a new wrinkle has occurred, as the operator of the Keystone Pipeline had to shut down the system due to a small Oil spill at a pumping station in Kansas. This pipeline transports Oil from the tar sand fields in Alberta Canada to the major Oil hub in Cushing Oklahoma. This is a major Oil pipeline capable of transporting just over 590,000 barrels of Oil per day, and should the outage last longer than anticipated, it could help elevate the storage glut seen in Cushing, which is the delivery point for the NYMEX WTI futures contract. In addition, continued government protests in Yemen have some traders fearful that some of the tension could spread to the Oil behemoth Saudi Arabia. The Oil rally has been tempered somewhat by weaker than expected economic data in the U.S. Most recently, less than expected readings from the Chicago Purchasing Managers report and lower Consumer Confidence readings in May could be showing that the US economic recovery is struggling, with high energy prices a contributor to the recent disappointing data. This data may be used by OPEC officials as a sign that the Oil market is well supplied, possibly resulting in their decision not to increase Oil output at their next meeting on June 8th in Vienna.
Technical Notes
Looking at the daily chart for July Crude Oil, we notice prices breaking to the upside out of the descending triangle formation, which negated this normally bearish technical formation. Tuesday's sharp rally moved prices above the 20-day moving average once again, spurring renewed short-term momentum buying. The 14-day RSI has moved back into neutral territory, with a current reading of 49.89. The May 11th high of 105.16 looks to be the next resistance point for July Crude, with support found at the May sell-off low of 95.18.
Mike Zarembski, Senior Commodity Analyst
