How Low Will Crude Oil Go?
During Tuesday's trading session, NYMEX crude oil futures are barely holding onto the $90.00 level and have lost 0.17% to $90.72. This is the fifth straight week in which crude has moved lower, and oil prices are sitting near new 2012 lows. The sell-off in crude is primarily due to investor anxiety about the European debt crisis and a corresponding aversion to risk assets.
Oil has been highly correlated with the S&P 500, and with that index down around 5% in May alone, crude has followed a similar path. A break of $90.00 in the coming days appears to be a distinct possibility, and that could lead to even heavier selling in the futures market. Over the last month, the United States Oil Fund ETF (NYSE: USO), which attempts to track the price movement of NYMEX crude, has lost almost 14%. During Tuesday's trading session, the ETF is down slightly, losing 0.03% to $32.22.
While it may seem tempting to gain exposure to oil at current prices given its previous upside volatility, such a move comes with considerable risk. If sentiment in the financial markets as a whole continues to deteriorate, more losses could be ahead for crude oil investors. While there is some previous support in the $90.00 area, the $75.00 to $85.00 range might be a better downside target for oil and could entice traders to become bullish once again.
In any event, given the high degree of correlation between crude, the S&P 500, and the EUR/USD pair, the commodity's future price trajectory will likely be determined by sentiment surrounding the European sovereign debt crisis, and by extension, the state of the global economy.
Traders who believe that crude oil is attractive at current prices might want to consider the following trades:
- Purchasing NYMEX crude oil futures contracts
- Buying the United States Oil Fund ETF (NYSE: USO)
- Buying call options either on crude oil futures or on the United States Oil Fund ETF (USO)
Traders who believe that there is still more downside in crude oil to come may consider alternative positions:
- Shorting oil using futures contracts
- Shorting the United States Oil Fund ETF (USO)
- Purchasing put options on crude futures or on the United States Oil Fund or a similar ETF
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