Since the Ukraine-conflict induced spike to $128, it has been a hard struggle for Crude Oil bulls, but there are now signs of life.
A more bearish scenario might be where investors are already long, thus assuming further rises.
But despite a near 33% rally from the lows around $63 in March, investor sentiment does not appear in any way euphoric, as although both speculators AND producers have rebuilt their long positions, it has been done both slowly and carefully.
This is the sort of market that can go on rising, as investors and traders gradually get “sucked into” the rally.
Capital Expenditure Falls
Both in the UK and abroad, Oil firms are reducing their capital expenditures in response to the more hostile environment they find themselves in.
The UK have raised another windfall tax on energy firms, leading to inevitable reductions in future supply of oil whilst the US government has now almost reached the practical limit of their SPR drawdown – stockpiles of oil are now at 40 year lows.
They also recently announced that their target for replenishing oil reserves was between $67 and $72.
This is course is now a floor for prices as any trader buying oil now has a near guaranteed stop loss via the US Government.
WTI Crude is thus highly unlikely to challenge those lows anytime soon, especially as it appears that Chinese demand is set to rise, prompting the IEA (International Energy Agency) to expect record high Oil demand this year.
Currently, with the December WTI future trading at $85.58, December options (expiring on November 15th) are priced attractively for bulls.
One can buy the 89 call at 270, sell the 91 call at 195 and sell the 94 call at 119, for a credit of 44, so one makes a profit in all circumstances except one where Oil expires above $95.
The higher prices go prior to investing the more favourable these terms are likely to get.
Furthermore, this area lies above the weekly closing highs in the period between August and October 2022, so should be relatively safe from the perspective of the 94 call short position, assuming nothing out of the usual occurs, e.g. a Chinese invasion of Taiwan.
The maximum return comes at $94, where the position would see a profit of 240.