How to Trade Crude Oil Inventories

Crude oil touched a new low last Friday of $39.55 per barrel, levels not seen since February 2009; it has since recovered most of that drop. Today’s price action has seen oil move $1 higher from $41.83 to $42.80. Tomorrow at 14:30 GMT will see data for crude oil stocks released by the Energy Information Agency; the forecast is for another reduction in stock of 1 million barrels after last week’s reduction of 1.682 million. A reduction would seem likely given the continued downward pressure on the price of crude oil. A sharp drop in the number released tomorrow may slightly reverse the downward trend; any number close to the 1 million mark should see the main trend continue. Crude oil’s price is under more pressure as Japan's, number three world consumer of crude oil, released figures today for GDP that showed a contraction of the economy by 1.6% on a yearly basis and China continue to face economic struggles. Also, whilst US Dollar remains strong it will keep pressure on the downside for crude oil price in the near future. 

Looking at the Monthly chart there is a strong support level at $32.40, red horizontal line, which is the previous low to last Friday’s. This is an important level as the last time it was reached a major reversal took place, which tends to create psychological barriers when they are met again.




On the day Chart we can see that price has wondered extremely far away from the Ichimoku cloud, which could signal signs of an oversold market. Nevertheless price still remains in a bear market. The candle for August 14th is a classical hammer bottom, typically leading to some reversal as the market plunged to a low of $39.55 and the recovered almost all of that loss, this type of action usually leads to new highs over the coming days, but there is so much selling pressure that this has not been the case.

Trading oil with options

If you think Oil decline will continue you may buy a Put option since a Put allows you reserve a sell price (the strike) over a certain period of time. For example, you may buy a Put to sell 100 barrels of oil at $42 strike until the end of this week. This option is shown in the image below on the ORE Web-platform, you can see it will cost a 29.38 USD premium to buy this option. 

If oil price falls below $42 by Friday the Put option’s value will increase and you may profit; if oil price falls below $41.40 by expiry you will profit at least 100% and if it falls below $41.10 you will profit at least 200%. If oil does not fall your maximum risk is 29.38 USD. To increase the premium size (and thus the risk and profit potential) you may increase the trade ‘amount’. 




If you think Oil will rise you may buy a Call option since a Call allows you reserve a buy price (the strike) over a certain period of time. For example, you may buy a Call to buy 100 barrels of oil at $43 strike until the end of this week. This option is shown in the image below on the ORE Web-platform, you can see it will cost a 46.19 USD premium to buy this option. 

If oil price rises above $43 by Friday the Call option’s value will increase and you may profit; if oil price rises above $43.92 by expiry you will profit at least 100% and if it falls below $44.38 you will profit at least 200%. If oil does not fall your maximum risk is 46.19 USD. To increase the premium size (and thus the risk and profit potential) you may increase the trade ‘amount’. 




If you think volatility will increase yet you do not have a view on direction, you may buy a Put and a Call option at the same time. Both the Put and the Call have the same strike, expiry date and amount. This option strategy is known as a straddle and returns a profit as long as the market moves significantly up or down. 
The image below is an example trade setup on the ORE web-platform. Here the strike is $42.75 to expire on Friday. It costs 123.56 USD to enter this position. If oil prices rises above $74 or falls below $71.51 by Friday a profit will be made - Profit potential can be checked using the Scenario trading tool.