Oil Market’s Glass Is Half-Full, At Least For Now

A rally in the U.S. stock market can do wonders for Oil bulls, as the entire energy complex has held firm despite a moderately bearish EIA energy stocks report on Wednesday. The Weekly EIA report showed that U.S. Oil inventories swelled by an additional 4.1 million barrels last week, well above the 2.3 million barrel gain most analysts expected. This build does not even include the additional 1.3 million barrel rise in the Strategic Petroleum Reserve (SPR). In addition, the release of a weaker than expected initial first quarter U.S. GDP figure of a decline of 6.1% annual rate shows economic contraction continued through March.

So what is keeping Oil prices steady despite lackluster demand? Well, Gasoline inventories fell by a larger than expected 4.7 million barrels last week , well above pre-report estimates of a more moderate 300,000 barrel decline, as U.S. refinery utilization fell to 82.7% last week, and Gasoline imports declined. Gasoline futures have been the strongest of the energy markets of late, as some traders look for potential supply tightness later this year — especially if there are signs of an economic recovery in the third and fourth quarters of 2009. The recovery in the stock market from its mid-March lows is also supportive to the Oil complex, as traders expect the massive stimulus programs to eventually jump-start economic activity.

Trading Ideas

Despite today’s gains, Crude Oil futures remain range bound, with prices holding near the center of a $10 price range the past few weeks. Those traders who are expecting an upside breakout of the recent trading range longer term may wish to investigate buying a calendar spread in Crude Oil options. One such potential trade would be buying a July Oil 55 call and selling a June Oil 55 call. As of this writing, with June Oil trading at 50.37 and July at 51.57, the spread could be purchased for around 1.90 points, or $1900 before commissions and fees.

The June options expire in two weeks, while the July options expire on June 17th. Traders who might choose to employ this strategy would be looking for the spread to widen, taking advantage of the time decay in the June options, and would hope to benefit by a potential widening of the contango between the June and July futures, as the United States Oil fund begins its monthly rolling of long positions from June to July starting on May 5th. Risks to the trade are a sharp decline in Oil prices or a significant narrowing of the June/July spread, especially near-term. A major near-term supply disruption would also be detrimental to this position

Technicals

Looking at the daily chart for July Crude, we notice prices continuing to trade in an even narrower trading range over the past several weeks. This is confirmed by the 14-day RSI, which has moved to a very neutral reading of 46.57. Moving averages are mixed, with prices just above the widely watched 100-day moving average, but below the 20-day MA, which is a favorite indicator for shorter-term momentum traders. Those technical traders who watch Fibonacci retracement levels will note that the July futures are holding near the 50% retracement level from the Feb 18th contract lows to the April 6th highs. Near-term support for the July Oil contract is seen as April 21st lows of 49.07, with resistance seen at the 20-day moving average currently at 53.40.

Subscribe by RSS Subscribe by Email