Near-Term Oil Prices a Trader’s Market: How to Play the Uncertainty
Uncertainty appears to be influencing oil prices near-term, and the long-term outlook doesn’t look to be showing much strength. For the time being, oil prices are stuck in a trader’s market.
Current and Near-Term Action in Oil Prices
Oil prices are currently at a crossroads with the longs and shorts battling it out. On one hand, there appears to be some decent support at the $40.00 level for the West Texas Intermediate (WTI), as prices for the May futures contract has been bid up to the $52.00 level.
Conversely, I expect to see some resistance selling, as oil prices edge higher due to the record oil storage and the fact that the global demand side continues to be a major overhang. China is importing less oil than the previous year, as the country battles economic stalling.
The wildcard situation with ISIS and the oil-producing country of Iraq appears to have stabilized for the time being. Moreover, a highly tentative nuclear technology framework with major oil producer Iran may not pan out if the religious fanatics in the country can stop it. However, if a deal is eventually struck, we could see a gush of oil flowing out from the country and pressuring oil prices.
While I cannot say with conviction where oil prices will be a year from now, the commodity will likely continue to be a quick trade (not a buy-and-hold situation).
Where’s the Price of Oil Headed Next?
WTI futures point to oil prices rising to the $60.00 level by June 2016 and $64.00 by December 2017. The direction is clearly higher. We are also seeing a spike in open interest on options strikes at above $60.00, which suggests a bullish view towards the price of oil.
A look at the Philadelphia Oil Service Sector (OSX) shows a recent upward break above the 50-day moving average, while bullish for near-term traders, may also be short-lived, based on the price action since oil prices started to plummet. In late August 2014 and mid-February 2015, the OSX crossed above the 50-day moving average (MA) on each occasion, but failed to move higher, subsequently breaking lower. The same could materialize this time around on the current break.
Chart courtesy of www.StockCharts.com
Oil prices in the U.S. will largely be dictated by the downward pressure on the number of oil rigs moved to the inactive list. More than 50% of all rigs searching for oil domestically have been shut down. This has helped to support oil prices, but the fact that prices have not surged quicker suggests the downward bias in the commodity and the continued fear of oversupply and lower demand.
The near-term direction of oil prices will largely be driven by supply and demand data, along with the situation with ISIS and Iran. Whether you are trading from the short or long side, it will continue to be a trader’s market, so look to snap up profits after moves.
Any major weakness in oil prices should be viewed as a long trade, while surges should be met by profit-taking or on the short end. You can also play this trade via call and put options.