Favorable Chinese GDP Reading Helps Support Crude Oil Prices
Wednesday, January 18, 2012
Since the 2011 lows were made back in October, Crude Oil futures have made a series of higher highs and higher lows which is supportive of bullish leaning trades in Crude Oil futures. Until this trend changes, traders may wish to explore bullish trading strategies using Crude Oil futures options. One such strategy is selling out of the money puts. For example, looking at the daily chart for March Crude Oil, we see chart support points near 92.50, 90.00, and 85.00. Traders may wish to explore selling puts with strike prices below these support levels with more aggressive traders looking to sell puts below the higher support levels. For example, with March Crude Oil trading at 100.13 as of this writing, a trader could sell the March 87.50 puts for 0.50 or $500 per option, not including commissions. The premium received is the maximum potential gain on the trade, which would be realized at option expiration in mid-February, should March Crude Oil be trading above 87.50.
Fundamentals
A "soft landing" for the Chinese economy may be the key to determine the direction for Crude Oil prices in 2012 as any signs of higher demand from the world's most populous country looks to be supportive for prices. Chinese gross domestic product for the 4th quarter rose by 8.9%, which was the slowest rate of growth in 10 quarters, but ahead of analysts' expectations. The slowing rate of Chinese economic growth is expected to allow for a more accommodative monetary policy in the coming months. This outlook has shifted some of the concerns of a "hard landing" for the Chinese economy and improves the outlook for commodity demand including Crude Oil. Oil prices have remained at elevated levels of late, mainly on geopolitical concerns running from a potential Iranian threat to block the Straits of Hormuz, to a potential strike in Nigeria that could shut down the country's oil industry. Though both these issues have not yet come to fruition, even the fear of possible oil export disruptions has put a "risk premium" into oil futures prices. Speculators continue to add to existing long positions in Crude Oil futures, with the most recent Commitment of Traders report showing an increase in long positions by both non-commercial and non-reportable traders, totaling a combined 28,238 contracts as of January 10th. Bullish comments from Saudi Arabia's oil minister stating that $100 barrel oil was "desirable" took some of the speculation away from the market that Saudi Arabia was prepared to raise its oil output sharply should economic sanctions be put in place against Iran.
Technical Notes
Looking at the daily chart for March Crude Oil, we notice prices holding near the short-term 20-day moving average(MA) and are over $3 above the longer-term 200 day MA. Since mid-November, prices have been holding within a relatively narrow $11 price range though recently we have started to see prices having some difficulty holding below $100 per barrel for any length of time. The 14-day RSI is neutral with a current reading of 51.14. Strong support is seen at the recent lows made back on December 16th at 92.95. Resistance is seen at the recent highs of 103.90 made on January 4th.
Mike Zarembski, Senior Commodity Analyst
