One More Leg Up For Crude Oil

London (Mar 24)  The last trade in our March seasonal portfolio is in the May crude oil contract. We expect the petroleum rally to continue. Our seasonal program will most likely trigger a buy signal Sunday night. This will make us long both crude and the RBOB unleaded contract. We’ll carry both of these positions through next week when we’ll offset the unleaded. Then, we’ll be long just crude oil through its exit, the first week of April. Obviously, these are highly correlated positions, and risk should be treated accordingly.

We’ve discussed the record-setting imbalance between the speculative and commercial trader positions in the crude oil market both here and in our Commitment of Traders column for Modern Trader magazine. We got a washout of 13%, which I was expecting. However, it did little to shake the speculative bid. Crude oil’s rapid rebound has emboldened the speculative buyers, whom we now expect will push crude oil above the January high at $66.02 for the May contract. In fact, this model projects a top near $68.25 with nearly 70% accuracy. This fits perfectly with a macro scenario that sees the oil drillers’ forward selling capping prices under $70 per barrel.

Now, the nitty-gritty.

Crude oil margin is currently $2,310. I do expect this to rise as volatility increases.

We will use a dynamic sell stop to protect this long position. Therefore, the risk will change daily and may exceed your initial trade plan’s threshold. We’ll be trailing a protective stop two average true ranges behind the previous day’s close. This has yielded a maximum loss of just over $3,000 in our testing and a projected initial risk of $2,600. The six-month high and low for this calculation is $6,040 and $600. The average loss in our testing has been just under $1,700. Remember, there is a half size mini-crude oil contract as well.

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