Oil Signal - July 7, 2013


By: Andrew Keene

As political unrest in Egypt is likely to continue, it is expected that this will cause oil prices to rise. Recently the military within Egypt has rallied against President Mohamed Morsi, causing bloodshed and violence around the country as supporters of the President are fighting back. With civil unrest likely to persist, it has the potential to incite major problems to Egypt’s energy infrastructure, which is crucial to delivering oil around the globe.

With the potential to see more violence throughout Egypt, which has control of the Suez Canal, investors are mostly in a wait and watch mode. If there were a problem at the Canal it is likely that we could see a spike in oil prices. The unrest within the country might also cause problems for areas within Egypt like the Sumed pipeline, which transports around 2 million barrels of oil per day.

Oil prices are also expected to rise after a better than expected U.S jobs report, which supports the likely increase in demand for oil. From the recent news on unemployment it is highly possible that the Federal Reserve will begin to taper off its bond purchases soon, which in turn will boost investments in commodities like oil.

U.S crude oil futures have hit a 14-month high after reaching over $102 a barrel. This is the highest that we have seen levels since May 2012. Brent crude oil hit a three-month high for its August delivery at $107.88 per barrel.

I think that Oil is headed higher, but I always want to define my risk vs reward.

My Trade: Buying the USO Aug 38-39 Bull Call Spread for $.25 debit
Risk: $25 per 1 lot
Reward: $75 per 1 lot
Breakeven: $28.25

Greeks of this Trade:
Delta: Long
Gamma: Long
Theta: Short
Vega: Long

Andrew Keene spent 10 years as an independent equity options trader on the Chicago Board of Options Exchange, during which he spent the majority of his time as a market-maker for over 125 stocks. Andrew currently trades futures, currencies and commodities. When he's not trading, Andrew appears on top business television shows including CNBC's Squawk on the Street, Street Smart on Bloomberg TV and First Business, a show that is syndicated across the United States. Andrew graduated from the University of Illinois with a degree in Finance with a concentration in Accountancy.