Traders Betting Against Crude Oil as Bear Market Closes In

Crude oil officially entered a bear market by reaching its lowest level since November on Tuesday (June 27).

Brent crude for August delivery slid 1.9 percent, or 89 cents, to $46.02 a barrel on London’s ICE Futures Exchange. US oil futures sank below $48, while West Texas Intermediate (WTI) crude declined 2.2 percent, or 97 cents, to trade at $43.23 on the contract’s expiration day. Since WTI fell more than 20 percent below its 52-week high, the commodity is formally considered to be in a bear market. 

This downfall was mainly due to rising concerns that growing output from the US and Libya may offset production cuts led by OPEC members. The news that Libya’s production has reached a three-year high of 827,000 barrels a day triggered the sudden decline. Libya has produced an average of 500,000 barrels of oil per day so far in 2017, while last year its output was only 300,000 barrels per day.

During a meeting held on May 25 in Vienna, OPEC members and Russia agreed to extend their deal to cut output through to March 2018. But with US shale oil drilling and increased output from Libya, investors are not satisfied that these cuts will balance the overhang of supply. The meeting was considered a failure because there were no production caps imposed on other oil-producing nations like Iran, Nigeria and Libya. Saudi Arabian Energy Minister Khalid al-Falih commented during the meeting that oil producers should “institutionalize cooperation,” and said that a monitoring committee will meet every two months to assess the situation and suggest if any policy adjustments are required.

A week before the meeting, data on traders’ positions from the Commodities and Futures Trading Commission showed that short positions in futures contracts decreased by 91,700 to end at 278,200, where each contract equals 1,000 barrels. That means speculative commodities traders cleared out their short positions ahead of OPEC’s meeting.

Some analysts are using United States Oil Fund (ARCA:USO) charts to track the price movement of crude oil. Based on the charts, the USO had held support since last August at around $9, but has now dropped below that level due to the recent production glut. The support level of $9 in the USO could be equated to $44 in crude oil. It appears that this downtrend may continue further, and the USO may reach up to $8, which compares to a crude oil price of $35 to $38. Based on such market data, binary options traders are using “put” options against crude oil to make maximum profits.

If you want to make money even during such a bear market situation, you should first understand what binary options are. Binary options are derivatives where you bet against the price movement of various underlying assets, like currency pairs, stocks, market indices and commodities like gold and oil. If you expect the asset price to decline, you must choose a “put” option, and if you believe the asset price will increase in the future then you should go for a “call” option. Binary options can generate profits even under declining market conditions, and you can make money by choosing a “put” option with crude oil as your underlying asset.

Based on historical data, oil is expected to continue with its downtrend in the coming months. CNBC has done a study using hedge fund analytics tool Kensho to see how WTI will perform in a span of six months after plummeting more than 20 percent from its recent highs. WTI has dropped 22 percent from the 52-week intraday high of $55.24 that it reached during January 2017. Based on historical statistics, oil has experienced seven similar bear market declines in the last 10 years. According to Kensho, after experiencing such bear market drops, WTI may plunge another 5 percent on average for the next six months.

Based on the analysis, the Energy Select Sector SPDR (ARCA:XLE) posted an average return of 6.7 percent as compared to the average return of 7.8 percent posted by S&P 500 (INDEXSP:.INX) during the same six-month period. According to an analyst poll conducted by Reuters, we can’t expect oil to have a quick rebound since market experts have become more pessimistic about the outlook for crude. For that reason, binary options traders can be sure that the bear market trend for oil will continue, and they can confidently buy “put” options against crude with longer expiry times during the coming months and succeed in their trades.

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Securities Disclosure: I, Prashant Sharma, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in contributed articles. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.