Crude prices have broken down, again. The macro story hasn't changed since last November: there's simply too much oil (both today and expected in the future) to balance with current and future demand. Oil is now produced/stored in sustained volume in a diversity of geographic locations that the so called "war premium" is really no longer relevant. With the exception of an OPEC (Saudi) production cut - which is highly unlikely b/c you don't issue ~$10bn in bonds only to cover a few months of deficit spending when you have $600bn+ in reserves, and the occasional technical bounce, it's increasingly difficult to convincingly make a bull case for oil prices.
Historically, we've seen large spikes off of the 44.15ish level. If you rode the decline for most of October, it probably makes sense to shift your risk strategy to accommodate the potential for a similar bounce. That said, if oil manages to close below the 44.10ish level, the technicals support a swift move to the 61.8% fib retracement at 42.75 (coinciding w/ a fib ext extension at 42.72). Oil volatility is low, both in absolute terms as well as relative to other asset classes and looks poised for a move higher.
I closed my short oil futures this morning and opened Dec 43 puts. The puts allow me to maintain short exposure, while reducing downside risk from any spike higher in oil prices off of the 44.15ish level. Moreover, the options also allow me to stay long oil volatility through a swift move to the 42.75 level.
The neutral region b/w 44.15 and 43.75 has historically been too volatile to hold futures directly. Until that area is cleared, in either direction, I plan to stick with options.
Historically, we've seen large spikes off of the 44.15ish level. If you rode the decline for most of October, it probably makes sense to shift your risk strategy to accommodate the potential for a similar bounce. That said, if oil manages to close below the 44.10ish level, the technicals support a swift move to the 61.8% fib retracement at 42.75 (coinciding w/ a fib ext extension at 42.72). Oil volatility is low, both in absolute terms as well as relative to other asset classes and looks poised for a move higher.
I closed my short oil futures this morning and opened Dec 43 puts. The puts allow me to maintain short exposure, while reducing downside risk from any spike higher in oil prices off of the 44.15ish level. Moreover, the options also allow me to stay long oil volatility through a swift move to the 42.75 level.
The neutral region b/w 44.15 and 43.75 has historically been too volatile to hold futures directly. Until that area is cleared, in either direction, I plan to stick with options.
