Crude Oil Overstreched

WTI Crude oil prices may have found a floor. The steep sell off that has dragged December futures lower by nearly 6% in the last two weeks may have run its course. Futures are oversold as indicated by stochastics and while the 50% Fibonacci level may not be your ultimate reversal point there appears to be mild support in the last two sessions. Under that level just above $97/barrel the next support level in my viewpoint is $94.5/95.00. It will take a settlement above the 8 day MA(orange line) to confirm an interim low. If I am correct that should play out next week.

I do not expect an aggressive trade higher but the $100 mark could be retaken in my opinion. I do think it will be a difficult task to see much more than that especially with the products as a drag…just yesterday RBOB futures touched 16 month lows. My experience is when you have bearish fundamentals and the market finds a bottom despite of this we could be close to a tradeable bottom. US oil supplies appear to be abundant with production increasing week over week and the demand expectations remain contained in the immediate future. Over the past five weeks data has shown stockpiles of Crude have gained 24.2 M barrels or 6.8%. Output has been rising…last week daily output was reported at its highest level in over two decades Sluggish economic growth is your third strike that does not bode for a return to the highs however a bounce I could see.

As opposed to get outright longs I like playing 13/14 spreads. Regular followers may remember we played this with options in previous months in the other direction. This particular trade is in futures purchasing 13′ and selling 14′ WTI futures. See two charts below to help illustrate:

December 13′ crude oil futures:

Crude oil futures chart for October 13, 2013

Crude oil futures chart for October 13, 2013

December 13 futures / December 14′ futures:

December 13 futures / December 14' futures:

December 13 futures / December 14′ futures:

In the last six weeks this spread have moved just over $7 or $7,000. While I am not looking for a return to the levels traded in September near $14 wide I do see the potential for a $3-4 tightening or $3-4,000 per spread. I would be willing to risk the trade to $5 or about $1,000 of risk per spread.

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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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