Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Where's Crude Oil Headed?

By Matthew BradbardCommoditiesJul 12, 2013 01:15PM ET
www.investing.com/analysis/where's-crude-oil-headed-175206
Where's Crude Oil Headed?
By Matthew Bradbard   |  Jul 12, 2013 01:15PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
In the last three weeks crude oil futures have appreciated 15% lifting prices to 14-month highs. Since lows were established on 4/18, prices have advanced nearly 25%. That will not continue -- at least at this velocity -- and, in fact, at the moment I feel prices have gotten ahead of themselves and we could see deprecation in the short term.

What If?
Instead of saying it will happen tomorrow or even this month, what if we widened the window to allow a trade to play out over the next six, 12 even 18 months? Together with one of my colleagues Kevin Davitt, whom I do a lot of energy trading with, we devised a strategy in the energy sector to do exactly that. Please do not misinterpret me and think that because we have two legs there is less risk…we could be wrong on both legs and incorrect on the directional play…the spread between December 14’ and December 13’ could continue to widen.
Crude Oil: Daily
Crude Oil: Daily

Options Or Futures?
December 14’ Crude is nearing a $9 discount to December 13’ Crude. This is the widest margin we have seen in years. I can only get data back to July 11’ with my software on this spread. Prior to this rout in recent months the highest discount was in the fall of 12’ at $6.50. Every $1 move in the spread equates to a $1,000 gain/loss. In the coming weeks to months I anticipate the spread narrowing to -$4.00-6.00. I think most of the pain is behind us but start with small size and be willing to scale into the trade. In full disclosure I think it a far better way to play this via options vs. outright futures and that is how I will be suggesting my clients to potentially capitalize on this opportunity. See suggested strategy below.
  • Buy December 14’$110 Crude call
  • Sell December 13’ $115 Crude call 1:1:
Crude Oil Strategy
Crude Oil Strategy

  • December 13’ futures @ $100.97
  • December 14’ futures @ $92.00
  • Selling $115 call for approximately $900
  • Buying $110 call for approximately $1,700
  • 127 days until expiration
  • 494 days until expiration 15 delta
  • 19 delta
Currently
It looks like this spread can be bought for approximately $800-850. To trade back to the median price we have seen in 13’ lifts this spread back to $1750/1800. What would it take to see this type of price action? The spread narrowing, which would likely mean a noteworthy correction in the near term, dragging crude back to $90/95 barrel. Theta or time decay in the 13’ option that have 75% less time value. An appreciation in forward contracts -- which means we would need to see demand increase on the curve -- which I view as the least likely case for this trade being profitable. Needless to say, for a trade with this risk/reward dynamic I think it merits energy trader’s attention.
Where's Crude Oil Headed?
 

Related Articles

Craig Erlam
Oil Rallies, Gold Vulnerable By Craig Erlam - Aug 11, 2022

Oil  Crude prices are rising after demand destruction fears have become overdone. Nationwide gas prices are now below $4 a gallon, and that should definitely provide some relief...

Where's Crude Oil Headed?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email