Analysis & News

Oil Report | Futures Desk
By Savas Kesidis - Client Adviser – Alpha Broking
December 9, 2010

Oil is a fungible global commodity, the price of oil is the same all over the world and it is always priced in US dollars. 

This means that a fall in the dollar relative to other currencies would result in the oil price going up relative to the dollar. In order to understand the price of oil, one must keep an eye on what the US is doing, what happens with regards to the US economy has real and visible effects on the price of oil. 

The Wall Street Journal reports, “The Federal Reserve on Wednesday set the stage for falling yields on bonds of just about every stripe, providing fuel for a weaker dollar and higher stock and commodities prices”.

This has already affected the price of commodities such as cotton, coffee and copper all of which are at Year to Date Highs and through our analysis we believe Oil is soon to follow.

Strategy Commentary

In a monthly oil report released this month, OPEC has forecast world oil demand to grow by 1m bbl/day to 86.4m bbl/day in 2011. The report further said that the demand growth would be fuelled by non-OECD countries like China, India, Latin America and the Middle-East. "On the product side, demand for industrial fuels will be strong as a result of the ongoing economic recovery. Demand for transportation fuels is also forecast to increase," it added

The world's oil demand growth this month has been kept at 900,000 bbl/day, the same as last month. OPEC predicts that OECD region will not see any growth this year, mainly due to declining demand in Europe. "In 2011, non-OPEC oil supply is expected to grow by 300,000 bbl/day. Brazil, Canada, Azerbaijan, Colombia, and Kazakhstan are forecast to be the main contributors, while Mexico, UK, and Norway are foreseen to experience the largest declines," OPEC said. So, the demand for OPEC crude this year has been pegged at 28.7m bbl/day, which is about 100,000 bbl/day lower than the previous month's estimates. Compared to last year the estimate is lesser by 300,000 bbl/day.

Most investors are somewhere between depression about the economic downturn and acceptance of it.  It seems as though a lot of cash is on the sidelines and as investors see no return with regard to these safe haven investments such as bonds a turn to riskier assets such as commodities may be the direction going forward. The $600 billion injection from the Fed will drive down these interest rates and force them to seek gains elsewhere.  The new Congress will keep the US economy ticking over, and not put costly road blocks in the way of economic development.  A lot of this uninvested money seems to be diverted towards Gold and Oil.

Strategy Recommendations

MARCH/11 Crude Oil CALL Spread:

BUY  1 x MARCH/11 Crude Oil 100 CALL @ Spread (settled @ 1.17)

SELL 1 x MARCH/11 Crude Oil 105 CALL @ Spread (settled @ 0.52) = Total Spread pts: 0.65 (1 Pt = $1,000 USD) Therefore $650 USD

Net Premium Paid: 1 x 0.65 = 0.65 pts (as of settlement prices) [$650 USD]

Margin: $5,000USD for 1 lot

Margin: $10,000USD for 2 lots

Risk Profile: Expected Max. Loss exposure [single lot]: $650 USD (1 Contract)

Risk Profile: Expected Max. Loss exposure [2 lots]: $1,300 USD    (2 contracts)

Profit Potential [single lot]: $5,000 USD (Minus Amount paid to buy spread i.e. $650 = $4,350)

Profit Potential [2 lots]: $10,000 USD (Minus Amount paid to buy spread i.e. $1,300 = $8,700)

Exchange-rate:      AUD/USD – 0.9868 (09/12/10 – 4:01 pm)

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* Chart US Dollar Index Source: eBridge Trader

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* Chart Oil Source: eBridge Trader

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