In the last three weeks Crude oil prices have risen better than $10/barrel trading within $1 of two month highs albeit very briefly Sunday evening. The failed spike higher in recent session can be attributed to unrest in the Middle East. As attention turned towards potential conflicts on Israeli airstrikes in Syria over the weekend… obviously any escalation of military conflict in this oil rich region has the potential to send oil futures higher.
I do not see any immediate danger of this and think Crude oil is over extended and short term we experience a setback. A trade above down sloping trend line (white line) was denied and a settlement back under the 8 day MA (orange line) would confirm a setback is underway.
Crude Oil Futures chart, May 7, 2013
While I a m not expecting the bottom to fall out my objective is the 18 day MA (dark blue line) which also represents a move back to the 61.8% Fibonacci level near $91.50 in June futures. The approach I have suggested to clients is short July futures while simultaneously selling out of the money puts 1:1. The options I’ve sold for clients have a delta of 45-50% so they should be able to capture approximately 1/2 the futures move and have a $2.50 cushion if the trade were to move against them. On a fresh high I would be willing to take a loss on the trade. If my objective is reached at $91.50 it represents just better than a $4 decline or $4000 move, 1/2 of that is $2000 per 1:1.
In the US it was reported that US crude oil stockpiles rose to 395.3 million barrels as of 4/26, the highest level in 30 years. I am anticipating a further increase on tomorrow inventory report. Saudi Arabia, the world’s largest oil exporter, increased crude production 1.8% in April to 9.3 million barrels per day, the highest level since November 12’. Not that the fundaments matter at all in the energy complex of late but both of these conditions are bearish.
A bearish technical picture in combination with these fundamentals justifies a bearish trade at current levels…
As always, I’m here to discuss specifics and give guidance. Give me a call…
To discuss in more detail this chart or any other you can reach me at: mbradbard@rcmam.com or 954-929-9997
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