What's Next for Oil?
Today's Idea Thursday, July 7, 2011
Crude Oil has bounced back, after falling to levels that could be seen as oversold and too low near the 90.00 level. Traders are now left with the question of where prices are heading over the near-term. Fundamentals are a mixed bag for Oil traders, so the inventory report today and the non-farm number tomorrow will be closely watched by many traders to set a near-term direction. Technically, the bull camp has the edge in recent trading, but the bulls' momentum could be fading. Some traders may choose to take on a neutral strategy, such as a short strangle -- for example, selling the August Crude Oil 94 put and selling the August Crude Oil 104 call for a credit of 0.75, or $750. The maximum profit would be the initial credit and the trade has unlimited risk. Traders may choose to mitigate some of this risk by buying double the number of long 89 put/109 call strangles at 0.13, or $260 for every short strangle put on. Another alternative would be to close the short strangle if the market breaks 104 to the upside or 94 to the downside.
Fundamentals
Crude Oil futures are higher this morning ahead of the EIA report, which is expected to show a drawdown for the fifth consecutive week. The Oil market had corrected sharply during the month of June, and it looked as though prices may have been heading below the $90 level. However, stronger equity prices and the belief that lower Oil prices will lead to a quick reversal in demand have caused prices to reverse course. Many traders have also greeted Greece's passage of austerity measures and acquisition of loans by taking on risk once again in stocks and commodities. This reversal from risk aversion to risk-taking, however, could be short-lived. Economic data in the US and Europe has been weaker than many would like. The People's Bank of China once again raised interest rates 25 basis points in an effort to cool commodity demand. Thus far, China has been unsuccessful in cooling commodity demand domestically and may refocus its attention to curbing the cost of non-food commodities, such as Crude Oil and base metals. Tomorrow's release of non-farm payroll data will likely be a market-mover. If the US economy was able to add more jobs than expected, bulls may feel emboldened. However, if the US sees weaker than expected job growth, traders' appetite for risk could quickly fade.
Technical Notes
Turning to the chart, we see the August Crude Oil contract bouncing off of the 90.00 market after several tests. Prices have cleared resistance at the 95.00 mark and are now approaching the 100.00 level. If prices are able to clear the $100 hurdle, the next level of resistance comes in at 103.88. The recent closes above the 20-day moving average suggest that a near-term low may be in place. If prices fail to take-out resistance at 100.00, prices could gravitate between 95.00 and 100.00 in the near-term.
Rob Kurzatkowski, Senior Commodity Analyst
