Is Crude Oil a Setup?

Can you say setup? The Crude Oil market looks to be just that, a setup. As I look at this market I can’t help but be lured into a long position. As a matter of fact…

I’m holding a Bull Call Spread from a few weeks ago that expires in about 10 days. The only problem is that everyone else is buying this recent run up right along with me. That makes me very uncomfortable. So uncomfortable in fact that I am ready to buy some OTM Puts for June that are selling for cheap at the moment. Anything under the 5900 strike seems to be a good buy respectively.
This isn’t to say that I’m bearish the market right now. As I see it the products are the driving force and the refineries haven’t impressed anyone with their transition so far this year. This has been primarily attributed to the change up in the additives that are required by the government this year. The latest numbers from the DOE seem to suggest that demand for Unleaded is outpacing the refinery utilization exponentially. So my Put purchase is more of a hedge than a position.
The news from abroad isn’t helping much either with the latest arrest of the Yukos V.P. in Russia and the Venezuelan government continuing to change agreements with Oil companies to the point that only 16 of the 22 have decided to continue doing business there. The expected increases in production from these regions should be all but counted out if the governmental biz grab continues in both of these countries. If you use history as an indicator then the 25% decline in production from Venezuela over the past 5 years during Chavez rule probably won’t be very comforting.
Friday’s sell off is probably due more to profit taking and less to easing supply concerns going into the weekend. While I continue to hold this bullish position into next week I am definitely watching out for a break below 6550 and 5970 thereafter.
Natural Gas keeps bouncing around in a tight range of support and resistance and over this week we saw somewhat of a double top formation. This market is still oversold and as air conditioners in the Midwest start humming again we this market should find its way upwardly out of the range.
We are going to continue holding the bull spread from 2 weeks ago as long as support holds over the next week.
Matt Odom 4-7-2006

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