How To Play The Drop In Oil Prices

Fundamentals

Crude Oil futures have fallen to nearly 2-month lows, on the back of a very bearish EIA energy stocks report. On Wednesday, the Energy Information Administration reported that U.S. Crude Oil stocks rose by 2.855 million barrels last week, well above the 1.4 million barrel draw most analysts were expecting. However, really bearish figures were seen in the energy products — Heating Oil and Gasoline — which both posted sharply higher increases last week. Ironically, the product builds came despite lower refinery rates, as product imports increased and domestic demand decreased last week. As we enter the fall refinery maintenance season, we may see Oil inventories increase even further as refinery shutdowns decrease current Oil demand. Some analysts believe Oil prices have been inflated, not due to real demand increases but as a “hedge” against a weakening U.S. Dollar. Like the Currency futures, speculators in the Crude Oil market are holding large net-long positions, as a weak U.S. Dollar is deemed bullish for commodity prices. However, once the speculative position moves to an extreme level, a massive short-covering rally in the U.S. Dollar becomes more likely, as weak currency longs rush for the exits on signs of a change in trend. The same situation may be occurring in the Crude Oil market, as traders rush to take profits, as there appear to be some technical signals that the Dollar’s decline might be near an end — at least in the short run.

Trading Ideas

Given the potential for a continued sell-off in Crude Oil prices due to liquidation of speculative long positions, some traders may wish to investigate bearish trading strategies to take advantage of any long liquidation. One such strategy would be selling bear call spreads. An example of this trade would be selling the November Crude Oil 73 calls and buying the November 76 calls. With November oil trading at 66.43 as of this writing, the spread could be done at a credit of 37 ticks, or $370 per spread before commissions. The credit received is the maximum gain for the trade. The maximum loss on the trade will occur if November Oil is trading above $76.00 at the option expiration in October.

Technicals

Looking at the daily chart for November Crude Oil, we notice the price decline accelerated once we had a daily close below the key 100-day moving average, which occurred on Wednesday of this week. This could be interpreted by both long and short-term technical traders that the trend has turned bearish. The 14-day RSI has also turned weak, with a current reading of 37.77. The July 13th lows of 61.38 are the next major support point for November Oil, with resistance found at the 100-day moving average, currently near 69.70.

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Comment by Narinder Pal

2009-09-26 13:22:45

dear sir,
plz send me crude oil and base metal trend and buy/sell position further live.on yahoo massenger
yhanking you

pal63@ymail.com

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