Manufacturing Sinks Crude
Tuesday August 2nd
The indecision over the debt ceiling set the negative tone for Crude Oil over the past week. If a deal is put into law, the weak ISM manufacturing data may have a more lasting impact on the Crude market, as this is clearly a sign of economic regression. Technically, the September Oil contract has broken through the lower end of the tight 95-100 trading range the market found itself in for much of July. Some traders may possibly wish to consider selling a September 102 call for a premium of 0.35, or $350. The trade has unlimited risk, so some traders may want to exit the position on a close above $100 in the September futures contract.
Fundamentals
Crude Oil futures suffered a setback in recent sessions due to the difficult debt ceiling discussions and poor manufacturing data. Even the tentative agreement reached over the weekend left many traders jittery, because every time a deal was seemingly done, it fell apart. The ISM manufacturing data released yesterday quickly quashed any momentum built by the weekend debt deal. The report showed manufacturing slowing to the lowest levels in two years and could be interpreted as possibly being one of the first concrete signs that the economy is heading toward a double-dip recession. Expectations that demand will continue to increase as part of the economic recovery appeared to be the main reason prices snapped out of the 70-80 range late last year. Regression may cool demand considerably, which could suggest a neutral to negative bias for the Crude market. In addition to the demand outlook being on shaky ground, supplies may be set to increase in the US. We saw seven straight weeks of inventory drawdowns before last week's surprise build. We may now see stocks being replenished in coming weeks. It is important to note that there is a tropical storm brewing in the Caribbean, which could strengthen to hurricane levels and target Florida. It is not expected to interrupt supplies, but that could change depending on severity and the route the storm takes.
Technical Notes
Turning to the chart, we see the most recent upswing in prices that began in late June fizzling out as the market approached the 100 level. Yesterday's close took-out the low end of the range that Oil has been in for several weeks at 95.00. This suggests prices may be slated to test relative lows near the $90 level. This is a make or break level for Oil on the downside, as the market must hold here to avoid a significant downside breakout.
Rob Kurzatkowski, Senior Commodity Analyst
