The DeCarley Perspective Trading Newsletter

Crude holding above $100, are we headed back to $110?

    This newsletter was emailed to DeCarley Trading brokerage clients on April 12, 2012.

DeCarley Perspective Commodity Analysis Newsletter

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

**Past performance is not indicative of future results

On the radar:

  • Crude holding above $100, are we headed back to $110?

Crude Oil Futures

Last month we issued a DeCarley Perspective suggesting that the quiet trading range in crude oil wouldn't last.  We were expecting prices to break out of the doldrums on the upside due to emotional aspects rather than fundamental, but the opposite eventually unfolded.  Not only were we off in direction, but we were also wrong about volatility.  Although volatility has increased substantially in the last few weeks, the market remains quiet relative to what has been the "new normal". 

This time around, we are going about things a little differently.  Ok...we lied, we are still looking for more volatility and we have not given up on the idea of a crude oil rally (eventually). 

Although March is known as a strong month for crude prices, we've seen very little strength.  Nonetheless, seasonals aren't perfect; sometimes they are just late.  Typically, crude oil has a tendency to rally throughout April and through much of May.  Don't forget, March through September is the "best seven months" to be bullish crude oil according to the Commodity Trader's Almanac.

The fundamental backdrop hasn't necessarily improved, but it doesn't always have to for things to turn the corner.  U.S. inventories of WTI crude are ample (365.2 million barrels, the highest since June) and the EIA recently lowered its 2012 global oil demand forecasts by 170,000 barrels.   Also putting pressure on energies is a stronger (or maybe stable is a better word) U.S. dollar.  As we all know, commodity prices have a tendency to trade opposite the greenback. 

With these things in play, we aren't convinced the absolute lows of this move have been posted.  Analysts are estimating that $100 crude oil still accounts for a $4 to $5 risk premium compliments of the Iranian situation (which has nearly been forgotten).  Coincidently, our charts suggest a break of support could land crude in the mid $90's before finding significant support. 

We'd love to see the mid $90's print; at this price we'd be comfortably bullish.  Also, the increase in volatility would likely give traders a much better risk reward ratio in the implementation of short crude oil strangles. 

If you aren't willing to hold out for the "possibility" of better prices well into the $90's, you might want to consider nibbling on bullish positions on a dip to minor support near $100, or better support at $98.  Assuming we are right about a rally from the mid to high $90's, the technical projection of the rally is calling for slight resistance near $105, with a $110 target objective.  If we are wrong, look for possible support near $94 and then again at $88. 

 Analysis of Crude Oil Futures

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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.

 

SEASONAL TENDENCIES ARE A COMPOSITE OF SOME OF THE MORE CONSISTENT COMMODITY FUTURES SEASONALS THAT HAVE OCCURRED OVER THE PAST 15 OR MORE YEARS.  THERE ARE USUALLY UNDERLYING, FUNDAMENTAL CIRCUMSTANCES THAT OCCUR ANNUALLY THAT TEND TO CAUSE THE FUTURES MARKETS TO REACT IN SIMILAR DIRECTIONAL MANNER DURING A CERTAIN CALENDAR YEAR.  WHILE SEASONAL TRENDS MAY POTENTIALLY IMPACT SUPPLY AND DEMAND IN CERTAIN COMMODITIES, SEASONAL ASPECTS OF SUPPLY AND DEMAND HAVE BEEN FACTORED INTO FUTURES & OPTIONS MARKET PRICING.  EVEN IF A SEASONAL TENDENCY OCCURS IN THE FUTURE, IT MAY NOT RESULT IN A PROFITABLE TRANSACTION AS FEES AND THE TIMING OF THE ENTRY AND LIQUIDATION MAY IMPACT ON THE RESULTS.  NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT HAS IN THE PAST, OR WILL IN THE FUTURE, ACHIEVE PROFITS USING THESE RECOMMENDATIONS.  NO REPRESENTATION IS BEING MADE THAT PRICE PATTERNS WILL RECUR IN THE FUTURE.

 

 

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