Expiration Pressures Starting to Build
Oil prices fell from 138.25 at Wednesday's high to a low of 131.55 by 11:AM Thursday morning. Bears were celebrating but the bulls were not impressed. Order volume picked up when the $132 level was reached and buyers drove the price back to close at $136.90. The nearly $7 drop was almost completely erased and prices are threatening another attack on $140.
The rebound was blamed on news from Nigeria that the state owned oil company would take over operations in parts of the country from joint venture partner Royal Dutch Shell. This is a move that traders believe could cut output. Analysts also said word of a possible strike by Nigerian oil workers contributed to the $5 rally. Technically the failure to drop all the way to support at $131 was also seen as a reason to buy.
Regardless of the Nigerian news the price of oil is going to become more volatile as the days progress. Tuesday is options expiration for crude oil. Next Friday is the expiration of July crude futures. Both events in past months has accelerated the volatility. There are tens of billions in bets that need to be covered before those expiration dates. Profit is not profit until the positions are closed.
The national average for gasoline hit $4.06 per gallon but with prices over $135 it has a long way to go to catch up with crude prices. Traders believe oil prices will make another run at $140 before expiration. That should guarantee at least $4.15 by July 4th. Remember Morgan Stanley predicted $150 oil by July 4th as well. At $150 oil we should see gasoline prices close to $4.50. Diesel reached a new record of $4.79 on Thursday.
If you are an oil trader I would look to be long over $137.50 and short the day after futures expiration.