Crude Oil Overstreched
Matthew Bradbard | Oct 24, 2013 03:36PM ET
WTI Crude oil prices may have found a floor. The steep sell off that has dragged December futures lower by nearly 6% in the last two weeks may have run its course. Futures are oversold as indicated by stochastics and while the 50% Fibonacci level may not be your ultimate reversal point there appears to be mild support in the last two sessions. Under that level just above $97/barrel the next support level in my viewpoint is $94.5/95.00. It will take a settlement above the eight-day MA(orange line) to confirm an interim low. If I am correct that should play out next week.
Back To $100?
I do not expect an aggressive trade higher but the $100 mark could be retaken in my opinion. I do think it will be a difficult task to see much more than that especially with the products as a drag...just yesterday RBOB futures touched 16 month lows. My experience is when you have bearish fundamentals and the market finds a bottom despite of this we could be close to a tradeable bottom. US oil supplies appear to be abundant with production increasing week over week and the demand expectations remain contained in the immediate future. Over the past five weeks data has shown stockpiles of Crude have gained 24.2 M barrels or 6.8%. Output has been rising...last week daily output was reported at its highest level in over two decades Sluggish economic growth is your third strike that does not bode for a return to the highs however a bounce I could see.
As opposed to get outright longs I like playing 13/14 spreads. Regular followers may remember we played this with options in previous months in the other direction. This particular trade is in futures purchasing 13' and selling 14' WTI futures. See two charts below to help illustrate:
In the last six weeks, this spread has moved just over $7 or $7,000. While I am not looking for a return to the levels traded in September near $14 wide, I do see the potential for a $3-$4 tightening or $3-$4,000 per spread. I would be willing to risk the trade to $5 -- about $1,000 of risk -- per spread.
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