Impending crude correction by mass rollover
This post is a guest contribution by Dian Chu, market analyst, trader and author of the EconForecast blog.
Thanks to Muammr Gaddafi’s airstrikes near a Libyan oil terminal, and protests in Iran adding to the continuing chaos in Middle East and North Africa (MENA), on Wednesday, March 2, Brent oil settled at its highest level since August 2008 at $116.35 a barrel, while WTI futures on NYMEX also advanced to $102.33 per barrel.
Peace by Chavez?
The International Energy Agency (IEA) said between 850,000 and 1 million barrels a day (bpd) of Libyan crude output has gone offline, and that the unrest in Libya had started to affect Europe’s oil supplies. Indeed, since Europe is the largest importer of Libyan crude, the supply disruption there had Italian and French refiners rush to secure cargoes driving an 18-fold surge in oil-tanker rates in two weeks.
Saudi & Nigeria Stepping In
Moreover, Nigeria, an alternative producer of Libyan crude grade and a favored oil supplier to U.S. refiners, said it will also increase daily crude exports of 14 main grades by 9.3% in April from this month.
Small Oil Disruption Risk
But from all indications, things most likely will not get out of control in Saudi as they did in Egypt and Libya for several reasons. The Saudi royal family maintains a tight control of the military force, and there’s not a significant opposition force. Furthermore, Saudi is in a much better economic state than Egypt, Libya, etc., and with a whole lot of petro dollars and resources to go around. And most importantly, the rest of world would hate to see any instability in Saudi Arabia.
Cushing Inventory at All Time High.
Take Delivery or Rollover
Now with crude prices bid up so much, traders are left with a dilemma – to be in the crude oil trade, players basically either have to take delivery, or rollover contracts and options comes expiration time. However, with storage at Cushing, Oklahoma pretty much at capacity, and price curve front month (April) loaded, it is doubtful that anybody would be in a position to take physical delivery.
It’s The Rollover That’ll Get Crude
From the current price and technical signals, WTI could easily correct down to $94 to $95, Brent could drop to $110 to $106 range. From a trading standpoint, short WTI at the beginning of the rollover, then cover when the trend starts to wane would be a good move in this March month.
Of course, there’s always the possibility that both oil markers could drop like a rock before the rollover should Gaddafi decide to step down in the next few days.
Disclosure: No Positions.
Source: Dian Chu, EconForecast, February 28, 2011.
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