Chart of the Day – Crude Enters Bear Market

by Enis June 21, 2012 1:08 pm • Commentary

This is a preview of what I’ll be discussing on Talking Numbers on CNBC today between 3:20 and 3:30 pm EST.

As I mentioned in my Morning Wrap, crude oil’s bizarre weakness yesterday piqued my interest.  When I look at the 5 year chart, I see an important break of the 3 year uptrend:

The green trend line has been convincingly broken, though short-term support lurks at the $75 level.  Crude is likely close to a short-term bounce given its severe oversold condition, but I would be an aggressive seller of any rallies for the rest of the year.  Crude has entered a new bear market.

On the fundamental side, CC had an insightful post on record inventories for crude oil back on May 10th (and it played a big part in my OXY trade), when crude was around $95.  Those inventories were an important tell that demand was just not sufficient to meet the supply of crude, and lower prices followed.  Crude has been sending a “produce!” signal for 2 years now as crude has traded between $75 and $115, but all that nascent production will likely lead to sustained lower prices in the many months ahead.

Market prices are indicating reduced global demand across the globe, but particularly in emerging markets.  Other industrial commodities like copper and iron ore are significantly lower in the last year, and BRIC countries have seen severe equity selloffs.  My trade idea in CAT last month was predicated on many of these trends, and if anything, they have worsened since then as developed market growth follows its emerging market brethren lower.

We are thinking about initiating a put calendar on crude to take advantage of the long-term bearish view.  Essentially, selling a short-term put and buying a longer-dated put would be one way to play for the short-term bounce from the oversold condition, but the longer-term bearish development.  Depending on the price action over the next few days or weeks, I will be watching USO for the appropriate trade structure and entry point.