Anyone with the slightest knowledge of simple economics is familiar with the supply and demand theory. It can be applied to virtually all commodities. Some people are introduced to supply and demand at an early age. You may be old enough to have traded baseball cards as a kid. You learned then that the price for a perennial All-Star was a bit more than the cost of a longtime journeyman who never hit .300.
As you aged you may have had to “pay up” too see your favorite rock band in concert at their peak, as the supply of tickets is usually a fixed amount. Almost everyone has some sort of experience with supply and demand, whether it is tickets, gasoline or housing.
CRUDE OIL RUNNING OUT OF STEAM?
Crude oil supplies had been creeping lower over the last few weeks. The price of crude continued to climb as the current supply dwindled. The August Crude Oil put in a high of 109.32 last week at the peak of the bull run.
PRODUCTION NEWS
I am of the opinion that this rally does not have much more left. On Wednesday, the markets received news that bucked the recent trend. U.S. production increased to 7.56 million barrels a day for the previous week. That is the biggest increase in nearly 23 years (December 1990) for production. We also learned that things aren’t so rosy on the Chinese economic front. Weaker job numbers and a decline in manufacturing activity (at an 11 month low) point to smaller demand from China, the world’s second largest consumer of crude.
DRIVING SEASON WINDS DOWN
I am looking towards the end of the summer season to play my bearish view. I like buying the October Brent Crude 95-91 put spread at 45 ($450.00) or better. Since the trade is long premium, risk is limited to the cost of entry plus fees and commissions. The maximum value of the spread is $4000.00 if both strikes are in the money at expiration (9/10/13). My first target for exit is at 90 points, if you are able to trade more than one position I would look to scale out at 20 point increments after that. If we don’t see a break in crude I would look to get out of the position at 20 points.
DEMAND DESTRUCTION
I don’t anyone who is a fan of higher gas prices that we see in the summer. We all have different ways of dealing with it. Some of us use public transportation or carpool. Many switch form fuel to pedal power. Others scale back activity completely. You may not realize while you are doing it, but you may have just altered the demand side of the equation.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
