CEA Monthly Issue – March 2015
Commodity Outlook: Oil
As you may remember from last month’s trade, bulls have a great case for higher oil prices.
Between huge cuts to capital spending at the world’s largest oil companies and a plummeting oil directed drill rig count, the commodity is virtually guaranteed to rise from current prices in the long run.
But believe it or not, oil could decline further before bulls really get their act together.
Let me explain…
Recent EIA oil inventory reports have made one thing abundantly clear- the US is awash in crude right now.
Over the past month, the EIA’s weekly reports revealed enormous additions to US oil inventory. As a matter of fact, for the week of February 27th, a whopping 10.3 million barrels were added to US stockpiles.
That’s the biggest weekly crude inventory build since March 2001!
But here’s what’s really concerning…
If supplies keep building at such a blistering pace, the US could run short of storage space. In fact, the head of commodities research at Citibank believes Cushing, Oklahoma storage tanks could reach their operational limits by mid-April.
In case you’re unaware, Cushing is an essential crude storage hub, on which Nymex crude trading is based.
Several imminent factors have the ability to make this scenario a reality…
First of all, US production is still rising quickly- a factor that’s easily noticed in the EIA’s weekly inventory data. What’s more, the Spring refinery maintenance season is here. Refiners are cutting back on production capacity to perform essential service and repair operations.
If refiners aren’t refining crude, more of the commodity will build up in storage.
How can we capitalize on a potential downturn in WTI crude?
Maybe you’ve heard of the US Short Oil Fund (DNO)?
DNO is an inverse commodity ETF that rises when the price of WTI crude falls.
And here’s the best part…
Since there’s a defined trading range in WTI crude right now, we can enter DNO with minimal risk.
Let me show you what I mean…
Technically Speaking:
As you can see, DNO has made quite a bullish run since October of last year. But over the past few weeks, the ETF has been stuck in a relatively tight trading range between $58 and $53.
But if WTI drops to the $40 a barrel area or lower, DNO will rise to at least $65. Given the US oversupply situation, there’s a possibility DNO sees $70 a share in coming months.
No doubt about it, that’s something we want to be a part of!
So here’s what we’ll do…
WHAT TO DO NOW:
US Short Oil Fund (DNO) is trading at $58.94
Buy DNO up to $59.50 per share
Our profit target is $70.00 or more
Risk Control Price is $53.00 (or a 10% stop loss from your entry point)
Category: Commodity Trading
