WTI OIL Commentary
Last week saw the price of crude surge back up from Wednesday’s close at $38.87 to current levels above $47.00 in the space of three trading sessions. The extra volatility may have been a spill over from last weeks extreme volatility experienced in the stock markets. It could also be due to a technical correction on the back of the longest decline in crude oil prices since it bottomed out in December 2008. Price also received a hand from China, which cut interest rates in an attempt to help the world’s largest consumer of energy get its economy back up to full steam, giving way to a recovery in the Shanghai Stock index and leading to hopes the world’s second largest economy may pick-up up again. These hopes were reduced sharply overnight, as Manufacturing PMI (Purchasing Managers Index) figures were released at 51.5, considerably lower than expected at 53.9 with a previous number of 53.8. Manufacturing is China’s largest contributing industry to GDP, such a drop in this number shows weakness in the overall state of the economy.
Tomorrow will see the weekly Crude Oil stock pile data released by the EIA (Energy Information Agency) in the US. Last week’s number was expected to add 1.8 million barrels but actually was released as a decrease in stock by 5.45 million. The forecast for tomorrow’s number is a decrease of 1 million barrels. If the reduction in stock is much greater than expected we may see oil price gain in value. EIA also published a report Monday showing that US production in April peaked at under 9.6 million barrels per day (bpd) and fell by 300,000 bpd over the following two months. Supply however is far from being short of demand which is weakening across the globe while OPEC producers, according to reports, are producing between two and three million barrels a day more than needed. Plus we still have to factor in extra supply from Iran once it actually hits the markets.
From the day chart below we can see the large increases in price over the three previous trading sessions which broke a downward trend that had been in place since June. This looks like a strong correction taking place, as the fundamentals for this commodity have not really changed. Looking at the MACD chart we can see how the blue bars are above the signal line (dotted red line) indicating that momentum is on the upside and there is still plenty of room for new highs as the blue vertical bars are not above 0 yet. Looking at the Monthly chart, last month’s candle shows a hammer formation, this is typically bullish when it appears at the bottom of a sustained down trend.
WTI OIL Daily Candle Chart:
WTI OIL Monthly Candle Chart:
How to Trade WTI OIL price action?
Through buying Options it is possible to create limited risk positions in the WTI OIL market. The following are trade examples set-up on the ORE Web-Platform.
Trade 1: WTI OIL to rally
If you expect Crude oil stock will reduce by more than 1 million barrels and Crude oil price will rise, you may buy a Call option because a Call gives you the right to buy Crude oil at a certain price (known as the strike) up until an expiry date. As oil price rises above the strike price the option gains in value and you may profit. The cost to buy the option ('open premium') is your maximum risk. You can close the option at any time before expiry to lock-in profit or reduce a loss.
The image below shows a WTI OIL Call option to buy 100 barrels at 47.3 over the next 3-days and it costs a 93.77 USD premium to open the trade.
The Call will generate income as WTI OIL price rises above 47.30, for example if oil is trading at 49.30 ($2 above the strike) by expiry the Call will payout 200 USD (100 barrels x $2). If WTI OIL does not rise and expires at or below 47.3 the option will have no value and you will lose the open premium.
Trade 2: WTI OIL to fall
If you expect a lower reduction in Crude oil stock than anticipated and the price of Crude oil to fall, you may buy a Put option because a Put gives you the right to sell oil at a certain rate (strike) up until an expiry date. As Crude oil price falls below the strike price the option gains in value and you may profit.
The below WTI OIL Put option to sell 100 barrels at 47.61 over the next 3-days costs a 94.22 USD premium.
The Put will generate income if WTI OIL falls below 47.61, for example if OIL price falls to 42.61 ($5 below strike) by expiry then the option will payout 500 USD. If WTI OIL does not fall and expires at or above 47.61 the option will have no value and you will lose the open premium.