Oil Rallies Despite IEA Sales
Today's Idea Wednesday, July 6, 2011
It appears that Oil prices have found support just below the 90.00 level in the August futures, as prices have rebounded sharply from the recent lows. However, it may be difficult for the rally to move prices significantly above the 100.00 level, at least in the near-term, unless we see significant signs of improving economic data in both the US and in Asia. This sets the stage for a possible price consolidation in the Crude Oil market. With less than two weeks until expiration, some traders may wish to explore selling strangles in August Crude Oil futures options, with strike prices below support at 90.00 and above 100.00. For example, with August Crude Oil trading at 97.20 as of this writing, the August 105 calls and the August 88 puts could be sold for 0.22, or $220 per spread, not including commissions. The premium received would be the maximum potential profit on the trade, which would be realized at option expiration on July 15th, should the August futures be trading above 88.00 and below 105.00.
Fundamentals
Crude Oil bulls certainly appear to be a resilient bunch, as futures prices have rallied during the past several sessions and are now trading higher than the day the IEA announced the sale of 60 million barrels of Crude from strategic reserves. The US auction of 30 million barrels of "light sweet" Crude from the SPR was well received, with several bidders interested in purchasing this high grade Oil, which could be an indication that global demand remains relatively strong. The recent stock market recovery may also be adding support to the Oil market, as there has been a recent correlation between energy and equity prices. A better than expected report on U.S. factory orders for May, which increased by 0.8%, added to the recent bullish sentiment. We may be seeing short-covering buying emerge, as prices failed to close below support at $90.00 in the August futures, which now should act as major support for lead month contracts. The most recent Commitment of Traders report shows both large and small speculators cut their net-long positions significantly last week, with just over 30,000 contracts closed out for the week ending June 28th. We may be seeing these speculators now buying back these long positions, as prices failed to move lower. Next up for Oil traders will be the weekly EIA energy stocks report due out at 10 am Chicago time on Thursday, due to the 4th of July holiday, as well as the highly anticipated Non-farm Payrolls report for June to be released on Friday. We will need to see positive readings from both reports to keep the bullish momentum going.
Technical Notes
Looking at the daily chart for August Crude Oil, we notice prices closing above the 200-day moving average for the first time since June 14th. Prices have moved back into the previous trading range between 95.00 and 105.00, and the 14-day RSI has turned up with a current reading of 51.36. The move to 2011 lows may have formed a 'V-shaped" bottom and, if true, may set the stage for another run at taking out psychological resistance at 100.00 per barrel. On the charts the next major resistance point is not found until the May 11th high of 105.52, with chart support seen at the June 27th low of 89.61.
Mike Zarembski, Senior Commodity Analyst
