Oil's Bullish Bias Reasserts Itself

Today's Idea

Since it certainly appears that there is a "bullish bias" in the Oil markets lately, it may be prudent to look for trades that will benefit from this bias. One such strategy involves selling puts in Crude Oil futures with strike prices below chart support levels. For example, with May Crude Oil rading at 104.79 as of this writing, and major chart support seen near the 97.00 area, the May Oil 94.00 puts could be sold for about 0.40, or $400 per option, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized at option expiration in mid-April should the May futures be trading above 94.00. Some traders may wish to close out the trade before expiration should May Crude trade below support at 97.02.

Fundamentals

It certainly appears that the Crude Oil bull is alive and well, as the lead month May contract has risen to its highest levels since the devastating earthquake struck Japan. It appears that Oil traders may once again be turning their focus to the Middle East and North Africa, where the fighting continues in Libya, causing Oil shipments from this OPEC member nation to grind to a halt. This has taken nearly 1.3 million barrels per day off the market, and although much of this production is being made-up by increased outputs from Saudi Arabia, the Oil normally being exported out of Libya is of a higher grade, which is highly prized by refineries. Since there's no telling how long Libyan production will be curtailed, it is vital that political unrest not halt production of other Oil producing nations in the region. This morning, some traders will likely turn some of their focus towards the weekly EIA energy stocks report. Many traders expect the EIA to show a rise in U.S Crude Oil inventories of between 1.5 and 2 million barrels last week. Though it appears that domestic supplies of Crude are still ample, the term structure of the NYMEX Crude Oil contract shows the market moving towards a backwardation starting in the late fall contracts of 2011. This likely indicates that the market is beginning to price-in tightening Oil supplies later this year.

Technical Notes

Looking at the daily chart for May Crude Oil, we notice what appears to be a symmetrical triangle formation. This formation is usually considered a continuation pattern in which prices ultimately move in the direction of the previous trend. In the case of Crude Oil, the previous trend was bullish. Prices have once again moved above the 20-day moving average, and momentum as measured by the 14-day RSI has turned positive, with a current reading of 62.73. The next major resistance level for May Crude Oil is not seen until the contract high of 108.25. Support is found at the recent low made back on March 16th at 97.02.

Mike Zarembski, Senior Commodity Analyst