Gains in black gold will be capped
SPREAD BETTERS love the volatility created by stormy markets and a veritable storm is brewing in crude oil at the moment – tropical storm Bonnie to be more precise. Fears that Bonnie would disrupt oil operations in the Gulf of Mexico over the weekend, combined with strong economic data, pushed crude oil more than 3 per cent higher to above $79 a barrel in trading on Friday.
Robust corporate earnings results and the report that China’s oil demand rose to a record high last month also helped to boost investor sentiment towards the commodity, which has struggled to make headway this year. Risk aversion, an engineered slowdown in China and, of course, the possibility of restrictions on drilling in the Gulf of Mexico following the BP disaster have all combined to cap gains in the commodity.
Indeed, oil has failed to break out of its 2010 trading range of between $64 and $86 a barrel. Bank of America-Merrill Lynch commodity strategists, led by Francisco Blanch, say: “In our view, this narrow trading range is the result of high inventories for both crude and products around the world, substantial excess upstream and downstream productive capacity, and a sluggish recovery in demand.”
They forecast that West Texas Intermediate (WTI) crude oil will average $78 a barrel in the second half of the year but note that in an environment where demand is no longer accelerating, oil inventory levels may prove to be too high to maintain price stability. Indeed, only last week we saw US crude oil inventories unexpectedly jump.
But while such a trading range might seem rather boring, it provides leveraged spread betters with a great opportunity to range trade a market that has actually seen its fair share of volatility.
Although typical measures of volatility – which measure the change in closing prices from one day to the next and average them over the previous 20 or 30 trading days – would suggest that oil price volatility has been exceptionally low in the first-half of 2010, intra-day volatility has actually been relatively high compared to previous periods and traders have experienced large daily swings in the market.
So what kind of range can we expect from crude oil over the summer? Ole Hansen, senior manager for contracts for difference and listed products at Saxo Bank, says: “The dollar’s 7 per cent move lower over the past couple of weeks has not had any major positive impact on oil prices, leaving some doubt about the ability of the market to move much above $81 in the near-term.” Technically, resistance sits at $80.9, which is the 50 per cent Fibonacci retracement of the May sell-off on the West Texas Intermediate (WTI) contract for September delivery. In terms of support levels, Hansen reckons that near-term support is just below $75 a barrel followed by $72.50.
The trick for spread betters will be to play the $70 to $81 range this summer. Place your stop losses just outside the range to make sure you don’t lose too big just in case oil makes a sharp directional move against you. Make the most of a tumultuous and stormy summer.