$100 Here We Come?
Monday, November 14, 2011
The bullish bias in Crude Oil futures combined with a relatively high implied volatility make this market a good candidate for the exploration of bullish short option strategies. For example, with January Crude Oil trading at 98.32 as of this writing, the January 80 puts could be sold for a 0.71 cent credit, or $710, not including commissions. The premium received would be the maximum potential gain on the trade which would be realized at option expiration in mid-December should the January futures be trading above $80.00.
Fundamentals
$100 per barrel seems to be a magnet for WTI Oil futures, as prices are moving ever closer to this key psychological price level. The rally in Crude is even more impressive given the turmoil in Europe and the potential for a recessionary environment going into next year. The rally in WTI Crude can most likely be attributed to the following: First, the supplies of Crude in the NYMEX delivery point at Cushing, Oklahoma continue to fall, as refiners with access to Oil in Cushing are taking advantage of the high refining margins attributed to "cheap" Oil at Cushing vs. the other major benchmark grades. This is drawing down supplies in Cushing and causing the term-stricture in the WTI futures to move towards a "backwardation", when the nearby futures contracts trade at a premium to the more deferred months, which is a sign that near-term demand is strong and the market is willing to pay a "premium" near-to draw supplies from storage and into the market. Next, signs of increased Oil production out of Libya following the fall of the Qaddafi regime and the likelihood of lower European Oil demand in the coming year have caused the Brent/WTI Oil spread to begin to narrow. This is causing some short-covering buying in the WTI leg of the spread, which is helping to support prices. In addition, Oil prices may be seeing a "risk premium" being expanded following a report from the International Atomic Energy Agency (IAEA) that Iran's nuclear program may include work on nuclear weapons, despite denials from the Iranian government, This has led to talk of potential economic sanctions that may affect Iran's Oil production output. Finally, any signs that Europe will come up with a meaningful way to deal with its debt crisis may lead to a return to "risk" trades, including the purchases of commodities including Oil.
Technical Notes
Looking at the daily chart for January Crude Oil, we notice prices closing above the 200-day moving average to end the week. This was the first weekly close above this closely watched technical indicator since July. The 14-day RSI is strong, with a current reading of 68.76. Though $100 per barrel is seen as strong psychological resistance, chartwise, resistance is not seen until just over the 102.00 area. Support for January Crude is seen at the November 1st low of 89.05.
Mike Zarembski, Senior Commodity Analyst
