The DeCarley Perspective Trading Newsletter

Crude oil futures have energy

  This newsletter was emailed to DeCarley Trading clients on October 24th.

Commodity Trading Newsletter 

Thank you for choosing DeCarley Trading.  We are proud to offer the DeCarley Perspective as an informational guide to our clients and subscribers.  We hope that you walk away from the newsletter with a better understanding of market fundamentals, as well as technical and seasonal factors. 

**There is substantial risk of loss in trading futures and options.

**Past performance is not indicative of future results

On the radar:

  • Seasonally bearish time for crude oil


Crude Oil

The most recent crude inventory report by the EIA suggested that crude oil stocks were a bit tighter than many had believed to be the case.  Specifically U.S. commercial crude oil inventories decreased by 4.7 million barrels from the previous week; nonetheless, at 332.9 million barrels, U.S. inventories are in the upper limit of the average range for this time of year.    Accordingly, we believe that recent strength in the energy complex is being propelled by optimism surrounding the Eurozone as opposed to any type of supply issue. 

Moderately surprising draws in crude oil are somewhat common during this time of year simply because refineries focus on heating oil production in anticipation of higher demand during the upcoming winter season.  As you can imagine, as refiners build heating oil inventories to a desired level they slow down in their consumption of crude, and oil inventory begins to build back.  Accordingly, crude oil futures have a tendency to find an October high and trade lower overall through early December.  This is in contrast to conventional wisdom that assumes demand for crude and distillates will be high during the coldest months of the year.  The fact is, those months see the highest consumer demand for energies but the producers (and therefore futures prices) compensate for the winter months well in advance. 

Adding to the bullish tilt in crude oil has been a relentless correction in the U.S. dollar.  After benefiting from flight to quality buying in the heat of the European debt crisis, the greenback has fallen precipitously in recent weeks.  However, we have to feel like the Dollar could be finding a short-term floor sooner, rather than later, and this could put pressure on crude.

We aren't necessarily looking for the bottom to fall out from under the market, but we do feel like a digestive move into the low $80's is probable.  In the meantime, look for resistance near $94; if we are wrong and this bull has legs the December contract could see as high as $101. 

The "Commodity Trader's Almanac" suggests a seasonal trade in which selling crude oil futures on or about September 13th through December 9th has produced 18 winning trades in the last 27 years.  The success rate is 66.7% for a total gain of $72,550.  It is clear that a trader following the recommendation this year would have done very well had they locked in a profit in early October, but perhaps the current rally is giving traders a second chance. 

If you aren't comfortable selling a crude oil futures contract, we can't say that we blame you...the market moves fast and it is very unforgiving.    One way to play the downside while trying keep out of the fire is to sell a deep out of the money call, we like the December $100's or higher.  These options doubled in value in today's session and only have about 26 days to expiration. 

Aggressive traders might look to implement a bear put spread with a naked leg using the December options.  For instance, it is possible to sell a December 98 call, and use the proceeds to buy a 90/86 put spread.  The cost of the trade will be about $200 before commission and fees with a max profit of $4,000.  The max risk is theoretically unlimited above $98 (similar to being short a future from this price). 

Some are holding short strangles implemented weeks ago, in which we have bought back the short put and are holding short 98 or 96 calls.  We'll be looking to adjust these if necessary in the coming days. 

 Crude Oil Futures and Options Trading

DeCarley Trading

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**There is substantial risk of loss in trading futures and options.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.


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