Iran Tension Fails To Inspire Oil Bulls

Fundamentals

Crude Oil futures are lower once again this morning as a result of the stronger US Dollar and concerns that the market may be oversupplied. The commodity and financial markets were surprised by a rally in the greenback during the G-20 meeting. Stimulus spending by G-20 members has caused debt to rise to a high percentage of GDP, similar to the US, causing foreign currencies to drop. Lingering concerns that the sharp increase in government debt around the globe may cause a double dip recession seems to be having an influence on trading. Time will tell whether this bounce in the Dollar has legs or is simply a short-covering rally due to technical support and oversold conditions.

The large supply of Crude Oil on the market, along with excess Gasoline and Heating Oil, has traders concerned that there may be a supply glut. With the driving season over, traders will turn their attention to the distillates market, which includes Heating Oil. Heating Oil stockpiles are above seasonal norms, and forecasts call for a mild winter, which could lead to further stocking of the petroleum product. Iranian tensions have done little to boost the price of Crude Oil. Traders seem worn out by the constant rhetoric from Iran and their western counterparts, suggesting market participants may wait for signs of material escalation in the conflict before diving headlong into the market. Even if the cantankerous nation was to cut their output in the face of possible sanctions, there is a mindset among traders that maybe the petroleum market is so oversupplied at the moment that we do not need Iranian Oil.

Trading Ideas

It seems as though the deck is stacked against the Crude Oil market, once again. Given the Iranian tensions and fickle nature of Crude Oil traders, however, the Oil market can turn on a dime for no discernible reason. Consequently, some traders may wish to take a cautious approach and consider entering into a relatively conservative strategy, such as a bear put spread. For example, some traders may choose to consider buying a November Crude Oil 65 put (CLX965P) and selling a November 62 put (CLX962P) for a debit of 1.25, or $1,250. The trade risks the initial investment for a maximum profit of 1.75, or $1,750.

Technicals

The November Crude Oil chart shows the market finally violating the triple-top pattern on Thursday. Friday’s spinning top pattern, however, indicates that the market may be set for a small bounce in the near term. This is supported by near oversold conditions on the 14-day RSI. If the market does not see a bounce in the next several sessions and we see a sell-off on oversold conditions, the breakdown on the chart can be seen as particularly important. The $60 level is a critical support area for the November Crude Oil contract. A significant close below $60 suggests prices may come down to test the low 50’s or even the mid 40’s.

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