Risk Premium Returning to Crude Oil Prices?
Wednesday, November 30, 2011
With less than three weeks to expiration and good chart support near the 95.00 area basis the January Crude futures, some aggressive traders may perhaps wish to explore selling puts in January Crude options with strike prices below support at 95.00. For example, with the January futures trading at 99.53 as of this writing, the Jan 90.00 puts could be sold for about 0.52, or $520 per option, 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 90.00.
Fundamentals
Heightening political tensions in Iran have become a focal point on many traders' radar screens, with the potential of economic sanctions including a ban on imports from one of the world's leading Oil exporters appearing to have supported Crude Oil futures prices. Nymex WTI futures continue to hover near the $100 per barrel level, and the Brent Crude premium to WTI has widened to over $10 per barrel on the potential for tighter Oil supplies should any supply curtailment from Iran occur. Iran is the third largest Oil exporter at just over 2 million barrels per day. The European Union would be among the hardest hit by any export ban, as it is the second largest buyer of Oil from Iran. Japan, China, and India are also large buyers of Iranian Oil, and any shortfall will force these nations to look elsewhere for their purchases, potentially pumping up prices in the global market. However, the current turmoil regarding a solution to the European debt crisis might be keeping Oil prices from rising even further, as any major economic slowdown should hurt demand for commodities, including Oil. Here in the U.S., many traders are looking for U.S. Crude inventories to have fallen moderately last week in the weekly EIA energy stocks report to be released later this morning. Current estimates are for a 200,000 barrel draw in U.S. Oil inventories. Large speculators lowered their net-long positions in Crude Oil futures last week according to the weekly Commitment of Traders report. Large speculators lowered their net-long position by just over 12,700 contracts last week to stand at 225,523 contracts as of November 22nd. Though a large net-long position, it is over 100,000 contracts below the record long position seen earlier this year and leaves plenty of room for traders to increase their positions without becoming overbought should we see Oil prices start to hold above the $100 level.
Technical Notes
Looking at the daily chart for January Crude Oil, we notice that the nearly $8 sell-off in prices last week may have been only a short-term correction in the recent bull market phase. Prices are now once again above both the 20 and 200-day moving averages (MA), and the 20-day MA is now poised to cross above the 200-day MA, which can be viewed as a bullish signal. The 14-day RSI looks strong, with a current reading of 60.93. The next resistance point for January Crude is seen at the recent high of 103.37 made on November 17th, with support found at the recent low of 94.99.
Mike Zarembski, Senior Commodity Analyst
