Bear Spreads Favored By High Volatility In Crude Options

Significant production cutbacks by mega-producers Russia and Saudi Arabia sparked a fire under the oil market to begin 2021.

The cuts have reached their objective and prices have increased to $65 per barrel. So both nations are considering relaxing them.

This would turn over 1 million barrels per day (BPD) to the market in short order. Furthermore, it would do so at the start of what is typically a seasonally bad time for the black gold.

The charts illustrate this seasonal trend. Like all trends, it is not bulletproof. Crude oil can surge during the spring and summer because of supply concerns and has performed so in the past. But with two of the globe’s most famous producers champing at the bit to move more product, we do not consider it will be an issue.

Crude is currently overbought and overdue for a change. Crude oil also appears to be delaying facing chart resistance at $65 per barrel. This is a level that has capped all rallies after 2015. Our downside target of $45 per barrel is just over the previous resistance at $44 per barrel. A classic Fibonacci retracement of 61.8% from current levels would transfer the price of black gold right throughout this level as well.

The Rise of Renewables

With the coronavirus Relief Bill’s passage, we assume the Biden Administration to change the focus to infrastructure and climate change. Fossil fuels will be de-emphasized and confused, and renewable fuels will be compensated.

We exact new US targets for emission cuts to be published during next month’s climate summit, perhaps doubling those offered in the Obama Administration.

While we don’t anticipate these to quickly change the supply and demand picture for crude oil – particularly in the next few months – we await them to strike the market’s overall psychology.

Power plants provide 25% of US emissions. Light-duty cars and trucks make an extra 17%. Batteries can be highly disruptive to both industries, decreasing fossil fuels’ overall demand, including gasoline refined from crude oil.

Could an improvement in the Federal portion of the gasoline tax be added in a future bill as an incentive for consumers to shift to EVs (electric vehicles)? It’s too quick to tell, but not outside the realm of chance.