Weekly Crude oil – I’m Eating Crow

Crude oil futures have advanced 13% in the last three weeks cutting through the $100 level like a hot knife through butter lifting futures to fresh 14 month highs. I anticipated a probe of this level as seen in previous posts but I did not see this type of acceleration. I was wrong. Much of the move can be contributed to the unrest in Egypt and the effect on the Suez Canal. Egypt not a big oil player but if the Suez Canal was shut down it would be a game changer as roughly 8% of the world’s seaborne crude flows via this canal. But let’s not overlook three other bullish developments. Back to back 10M barrel draws in our weekly inventories…Holy Schnikees! The lowest level in 5 months putting inventories at 373.9M barrels. Over two weeks with inventories dropping near 20M barrels, or 5.1%, that is the largest fall over a two week period on record. This according to EIA records that date back to 83’. OPEC made a statement today that global demand will accelerate next year, forecasting a rise by 1M barrels a day, but warned that an expected supply boost could be jeopardized by political unrest. A tropical storm moving towards the gulf (Crude platforms). A perfect storm no pun intended … these factors in my opinion have unjustly caused prices to move too high too fast.

As I’ve previously voiced do not jump in front of this freight train with outright bearish trade…hedge futures off with options, have stop out points or be long Brent against WTI…that is my favored play for aggressive types.

Crude Oil Futures, July 10 2013

Crude Oil Futures, July 10, 2013

Digging deeper into the weekly chart above no serious resistance is seen until $110/barrel so tread lightly. Remember markets can be irrational longer than most investors can be solvent and this is no different. Expect extreme volatility/risk if playing in these waters. I do feel that Energy prices are very close to a turning point but go in with your eyes widen open as we are seeing extreme moves.

Some considerations:

  • Brent should be at more than a $2.50 premium to WTI in the coming weeks/months.
  • Every $1 gain/loss in Crude should equate to 3-5 cents move in the products…in theory in the same direction.
  • The worst case scenario likely is already factored into energy prices in regards to Egypt unless circumstances get worse.
  • It is unlikely that we get 10M barrel draws week over week in oil inventories.
  • Eventually higher prices become a determent and effect demand…therefore effecting price.
  • In the last two weeks of trading before expiration expect exaggerated moves.

As always, I’m here to discuss specifics and give guidance. Shoot me an email…Give me a call…you can reach me at: mbradbard@rcmam.com or 954-929-9997

Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions (“Forex”) before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.

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