Crude Oil: I'm Eating Crow

Includes: BNO, OIL, SCO, USO
by: Matthew Bradbard

7/10/13 Weekly Crude oil - I'm Eating Crow

Crude oil futures have advanced 13% in the last three weeks cutting through the $100 level like a hot knife through butter lifting futures to fresh 14 month highs. I anticipated a probe of this level as seen in previous posts but I did not see this type of acceleration. I was wrong. Much of the move can be contributed to the unrest in Egypt and the effect on the Suez Canal. Egypt is not a big oil player but if the Suez Canal was shut down it would be a game changer as roughly 8% of the world's seaborne crude flows via this canal. But let's not overlook three other bullish developments. Back to back 10M barrel draws in our weekly inventories…Holy Schnikees! The lowest level in five months, putting inventories at 373.9M barrels. Over two weeks with inventories dropping near 20M barrels, or 5.1%, that is the largest fall over a two-week period on record. This according to EIA records that date back to 1983. OPEC made a statement today that global demand will accelerate next year, forecasting a rise by 1M barrels a day, but warned that an expected supply boost could be jeopardized by political unrest. A tropical storm moving towards the gulf (crude platforms). A perfect storm ... no pun intended. These factors in my opinion have unjustly caused prices to move too high too fast.

As I've previously voiced do not jump in front of this freight train with an outright bearish trade...hedge futures off with options, have stop out points or be long Brent against WTI. That is my favored play for aggressive types.

Digging deeper into the weekly chart above no serious resistance is seen until $110/barrel so tread lightly. Remember markets can be irrational longer than most investors can be solvent and this is no different. Expect extreme volatility/risk if playing in these waters. I do feel that energy prices are very close to a turning point but go in with your eyes wide open as we are seeing extreme moves.

Some considerations:

· Brent should be at more than a $2.50 premium to WTI in the coming weeks/months.

· Every $1 gain/loss in crude should equate to a 3-5 cent move in the theory in the same direction.

· The worst case scenario likely is already factored into energy prices in regards to Egypt unless circumstances get worse.

· It is unlikely that we get 10M barrel draws week-over-week in oil inventories.

· Eventually higher prices become a determent and effect demand ... therefore effecting price.

· In the last two weeks of trading before expiration expect exaggerated moves.

Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the financial products herein named. Trading futures, options and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.