Financial markets continue to play a large role in crude oil’s recent consolidation phase. The current out-performance of several Western equity indexes, such as the S&P 500, have indicated optimism that the worst of the recent economic decline is behind us. Several fresh economic surveys have shown surprising results to the upside, with the Institute for Supply Management’s factory index revealing U.S. manufacturing is shrinking at a much slower pace than expected. It is now possible to read in the data strong indications of a soon-to-be-expected improvement in oil demand. Further out along the futures curve, relatively tighter supply/demand fundamentals as well as expected inflationary pressures leading to a weaker U.S. Dollar have put a firm cushion under both crude and product markets.
Of course, stubbornly high inventory levels should continue to act as an overwhelming weight balancing out any medium- to long-term bullish pressure. Despite Friday’s sharp rally, expect front-month WTI to pare back gains and drop once again towards $50 as the June contract failed to move convincingly above resistance at $53. Expect similar bearish price action in Asian markets as many traders return from the recent holiday weekend.
Long traders and producer hedgers looking to take advantage of the recent rise in crude prices can buy the Asian (APO) June WTI $55 put for around $4.00. This short strategy provides maximum downside profit potential with only $4 of potential losses to the upside. Similarly, the $60 call can be sold to finance half the purchase price of the $55 put (this strategy is also somewhat riskier while providing more immediate downside exposure).
Singapore, 09:00
Sunday, May 3, 2009
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