Crude oil has been in liquidation mode, brushing off bullish news as a weaker economy and prospects of slowing demand have buyers rushing for the exits. September NYMEX futures ended at a three-month low under $120 a barrel on Tuesday, August 5, 2008.
Although the market is edging up in early trade this morning, traders can use this bounce to establish a bearish position. I see support at $110, and $100 on a continued correction. The bull market may not be over in crude, but for now, it’s taking a pause.
Bullish news just isn’t eliciting the type of reaction we would expect to see in a healthy market. After crude oil started falling from its record high of $147.27 hit on July 11, Goldman Sachs predicted the price of oil would rebound back to $149 a barrel by the end of this year. The firm’s bullish predictions had sparked the market before, but this time, market participants didn’t seem to take notice. There is concern the weakening economy and high prices at the gas pump will reduce demand. Goldman had said record prices had “restrained, but not destroyed” consumer demand.
According to a MasterCard report released on August 5, U.S. gasoline demand fell for a 15th consecutive week. Demand last week dropped 3.4 percent from a year earlier. That type of news has taken center stage in crude oil for the time being. I also see some fallback in demand from China likely following the Olympics.
Geopolitical events are causing some mild bounces, but not eliciting the big price spikes in crude oil we’d seen this spring and early summer, when bullish sentiment was peaking.
Tensions are escalating with Iran. The U.S. has called for additional ”punitive” measures against Iran over its nuclear program. There was also a BP Plc-led pipeline explosion in Turkey reported this morning, causing a mild uptick ahead of the Energy Department’s weekly inventory numbers. The Energy Department reported crude supplies climbed by 1.7 million barrels to 296.9 million for the week ended August 1. Gasoline supplies fell 4.4 million barrels to 209.2 million barrels.
As I see more near-term declines, I recommend a bearish spread in October options, which expire on September 17. Buy the October 115/112 put spread, and look to get it filled on the bounce today. This trade will cost about $750 not including your commissions (your defined risk), and offers a potential of about $2,200 if the market moves in your favor.
Feel free to call me with any questions you have about this strategy or others to suit your particular account size and risk tolerance. Ask about our special half-off commissions offer for new clients.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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