The DeCarley Perspective Trading Newsletter

Crude Oil's Slippery Slope

This newsletter was emailed to DeCarley Trading clients on January 3rd, 2012

DeCarley Trading Client 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:

  • Oil's slippery slope

Crude Oil

In a DeCarley Perspective dated December 3rd, we suggested that a pullback in crude oil into the low 90's could be an opportunity for the bulls.  However, this time around seasonal tendencies and technical analysis has us leaning the other way despite today's gangbuster rally.

To start out the New Year, February crude rallied over $4 in a single session on Middle East tensions combined with a weaker dollar and higher equity prices.  As we are all aware, higher stocks is  (currently) considered an optimistic outlook for economic growth, and therefore crude oil demand.   Additionally, because crude is priced in U.S. Dollars a weaker greenback is supportive for crude prices as well as overseas demand. 

Tension between Iran and foreign nations is heating up and this appears to be enabling ballooning energy prices as traders build in a risk premium.  However, it is important to remember that Iran began threatening oil tankers and/or missile testing in the Straits of Hormuz as early as mid-December.  Accordingly, the recent $10 increase in oil traded on the NYMEX can largely be attributed to fears of some sort of interference in oil shipments through the canal.  Most analysts agree that a complete closure of the Strait is an absolute worst-case scenario and isn't necessarily likely.

Had it not been for surprise builds in WTI inventories in Cushing Oklahoma, crude oil might be trading $3 to $5 higher today.  Last week's EIA report suggested inventories had risen 3.9 million barrels to 327.50 million stored.  Historically, this area has been a relatively comfortable level; the previous decade has seen inventories hover between 270 million barrels to about 370 but has spent most of the time near 330.  In theory, this combined with lackluster economic activity should be enough to cap the upside potential in crude oil. 

Although we think all signs are pointing south, we can't ignore the fact that the momentum is higher and specs are starting to get excited about crude oil again.  With this in mind, we feel the best course of action is to patiently wait for better prices to being establishing bearish positions.  Specifically, it appears as though follow through buying will likely bring the February crude contract into the $106/$107 area.  However, further deterioration in Middle East stability could lead to a quick run to the $109 area.  We'll be comfortably bearish near the first noted area but urge traders to save some ammo for the possibility of prices reaching the latter level (at which time it might make sense to add on to bearish trades). 

Some of you might be holding short March 122/78 strangles which are essentially breaking even.  We'll be looking for a place to buy the puts back in the coming days and might look to ride out the call "naked". 

Crude Oil Futures Chart 


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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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