Crude Oil: Tug Of War…
Crude bears came out of hibernation yesterday. After brushing against 6-month highs at $105 a barrel last Friday, West Texas Intermediate (WTI) crude oil spiraled lower by nearly $2 a barrel on Tuesday.
What has this commodity careening lower?
Investors are concerned US inventories are on the verge of swelling beyond seasonal norms. In fact, this morning’s EIA oil inventory report revealed another 3.5 million barrels were ushered into storage for the week of April 18th.
As you may remember, the most recent storage gains come on top of a huge 10 million barrel build for the week of April 11th. The recent rash of strong inventory additions has US crude stocks sitting at 397.7 million barrels- an all time record high!
No doubt about it, the US is swimming in crude right now.
Let me show you what I mean…
As you can see in the blue line above, US oil inventories are surging. Given the abundant supply situation, it’s hard to believe crude is still trading over $100 a barrel.
If inventories continue rising in coming weeks, there’s a very good chance we see oil drop firmly below the all-important $100 level.
But before you get too bearish on oil, listen to this…
The deepening Ukrainian political crisis could keep WTI downside limited.
The situation in this former Soviet Republic appears to be spiraling out of control.
As you’ve likely heard, pro-Russian separatists are taking control of government buildings in Eastern Ukraine cities.
In response, Ukraine’s acting president, Oleksander Turchinov, is calling on his forces to launch an offensive. Retaking the buildings is essential for keeping Eastern Ukraine from falling further into the hands of pro-Russian separatists.
Speaking of Russia…
US politicians are calling for additional sanctions on Russia due to their involvement in Ukraine. If hefty sanctions are applied, essential Russian oil exports may shrink. And since the country is one of the largest oil exporters in the world, the global supply/demand balance may soon be left in a precarious position.
Unfortunately, investors have good reason to keep a fear premium in the oil market until the situation cools.
As you can see, there’s a tug of war in the oil market right now…
Bears are focusing on swelling US crude inventories, while bulls point to the situation in Ukraine.
How can you capitalize on the situation?
If you think crude bears will eventually take control, take a look at the US Short Oil Fund (DNO). This inverse commodity ETF rises as the price of crude falls. Given the current US supply situation, there’s a good chance WTI sinks to the $95 a barrel range by the end of May.
But if you believe the Ukraine situation will push crude prices even higher, then you need to look to the US Oil Fund (USO). USO trades directly with crude prices. In other words, when WTI rises, so will USO.
Until Next Time,
Justin Bennett
Category: Crude Oil
