“Crude oil prices fell to a seven-session low on a rise in U.S. crude inventories and a stronger dollar, as worries over sovereign debt in Europe led investors out of assets perceived as risky.” Wall Street Journal article, March 25, 2010; by Carrick Mollenkamp
“Crude oil prices climbed, gaining almost 3% in response to new evidence that the global economy is strengthening. But developments in recent days indicate investors are wary about the future.” Wall Street Journal article, March 30, 2010; by Liam Pleven, Spencer Swartz and Claire Rangel
Just over four weeks ago we wrote that the duel between economic recovery and accompanying inflation versus economic stagflation and unemployment has kept crude oil futures within a $13.00 barrel trading range since October, 2009. So what has changed?
Very little, as crude oil continues to trade in a sideways congestion range. What has changed perhaps is the new fundamental focus of a strengthening US dollar, debt woes in Europe and an increasing crude oil inventory build-up.
Total Crude Inventories Continue to Build
The DOE reported Total Crude Inventories increased by 7.3 million barrels to 351.3 million barrels for the week ending March 19, 2010. 4.0 million barrels of that increase was in PADD 3, due in part to the large increase of 969,000 barrels per day of Crude Imports. Crude Runs remain at close to 14.0 million barrels per day. So while the Total Crude Stocks are roughly 5 million barrels below last year at this time, because of low Runs rate the Days Forward Supply is at a record level of 25.2 Days for this time of the year.
Dr. Joel Fingerman, Fundamental Analytics (www.fundamentalanalytics.com), March 24, 2010
The current price of June crude oil futures is $82.85/barrel (as of March 30, 2010, 3:00 pm CT). This places the current market approximately $64 below the last major HI and $50 above the last major Low. This Report is not making a specific Bull or Bear trade recommendation but we do believe a major breakout – whether to the upside or downside – is imminent and that traders should carefully monitor the market and have a personalized trading plan ready.
Trading strategies for a possible move to the recent historic Highs and Lows can include outright futures positions but also Long Strangles in options on futures.
Long Option Strangle
An option strangle involves purchasing a put (near the low of the underlying futures contract’s trading range) and simultaneously purchasing a call (near the high of the futures contract’s trading range). The risk is limited to the combined cost of both options plus the commissions and fees (commissions are charged on both “legs” of the option spread). The strangle is most often considered when a market has been stagnant or within a defined trading range. [NOTE: limited risk refers to the amount of the loss and not the likelihood of loss.]
Contact a Zaner Group broker to discuss this and other strategies that match your risk/reward outlook, your risk capital and your expectations about crude oil.
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Trading futures, options and forex is speculative in nature and involves substantial risk of loss.