Crude Volatility

Crude oil has taken a brief break from the popular “how low can it go” catchphrase. Since mid January talk of crude at $25, or even $20 a barrel was making the rounds. Production levels were continuing to rise, and demand was being met. It’s almost funny how a little chatter can shake things up.

Last week it looked like 25.00 was in sight as the front month trade at 26.05 on its low. But then rumors started hitting the newswires. Reports started surfacing that Russia was going to meet with OPEC to discuss the idea of possible production cuts.  Almost immediately the brakes slammed on a further move down, and a strong rally followed. The upward move continued Friday ahead of a three day weekend, the combination of the rumors and some profit taking probably helped crude almost $2.00 higher.

Tuesday saw a back and forth session as the debate over any deal between OPEC (Iran and Saudi Arabia being key) and Russia continued. As the week went on we learned that there may be a meeting, but we might see a freeze on production levels, not any cuts.  As traders and investors got a better hold on what a “deal” between Russia and OPEC may look like, the market sold off.  There won’t be any cuts, Saudi Arabia and the rest of OPEC will keep up their current levels of output. That doesn’t’ sound like a supply side issue to me.

I’m not going to throw out what I think the high or low for crude may be. But I will predict we will see volatility and swings.  In the near future it looks like the supply will continue to meet demand. Just remember that the crude market can be spooked by any news pretty easily.

Looking for more volatility, we are trying to strangle the market using a package of ratio spreads.  I am looking at the following trade to take advantage of a directional move.

Buy 1 July Crude 30 Put, Sell 2 July Crude 26 Puts at -2 points

Buy 1 July Crude 40 Call, Sell 2 July Crude 45 calls at -38 points

Purchase both spreads as a package at -40, collection $400.00 (minus fees and commissions).

Be sure and check margin requirements to see if this is suitable for your account.

 

For those interested Walsh Trading is holding our weekly grain webinar Friday February 19th at 2:00 PM Central time hosted by our Senior Grain analyst Tim Hannagan. Tim has been ranked #1 by Reuters and Bloomberg in 2011 and 2012 for his most accurate end of year price predictions for soybeans and corn. Registration is free and if you cannot attend live, a recording will be sent to your email upon signup.

John Weyer

Director of Commercial Hedging

Walsh Trading Inc.,

jweyer@walshtrading.com

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.