Crude oil is back, at least for today. Yesterday marked the first day since the end of September that oil tested and broke under the $80.00 per barrel mark in futures. During that rally, it took only six trading days to go from under $80.00 to $85.00. Today’s move is being exacerbated by a weaker dollar, a government weekly inventory report and renewed quantitative easing optimism.
The Department of Energy showed that U.S. weekly crude inventories rose by 667,000 barrels to 361.199 million barrels. The gain in inventory sounds adequate, but Dow Jones forecast a gain closer to 2 million barrels. The big change and discrepancy is in finished products, where gasoline inventories rose by more than 1.5 million barrels to over 219.3 million barrels. The Dow Jones expected a drop of 1.3 million barrels as opposed to the gain.
United States Oil (NYSE: USO) does not always track oil closely, but the ETF shares are up +2.3% at $35.42 in fairly active trading. The erosion has to be watched long-term here, but in ETFs this is one of the key go-to shares for oil upside exposure.
Perhaps one of the oldest and biggest Oil ETFs is the Oil Services HOLDRs (NYSE: OIH), which is full of the oil service companies. These are up +1.4% at $117.15. Keep in mind that Baker Hughes Incorporated (NYSE: BHI), Halliburton Company (NYSE: HAL), Schlumberger N.V. (NYSE: SLB), and Transocean Ltd. (NYSE: RIG) account for nearly 50% of the ETF.
The leveraged ETF/ETN products that track the companies behind oil are on the move as well. ProShares Ultra Oil & Gas (NYSE: DIG) strive to achieve twice the daily performance of the Dow Jones U.S. Oil & Gas index. It has components such as Exxon Mobil (NYSE: XOM) and Chevron Corp. (NYSE: CVX) which comprise a huge portion of that index. These shares are up +2.3% at $34.60 today. The ProShares UltraShort Oil & Gas (NYSE: DUG) is the inverse of this and seeks to achieve twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index. The double-short ETF is down -2.5% at $50.82.
What is interesting about today’s recovery is that options trading is slightly elevated. In OIH, the NOV-2010 CALLS in the speculative strikes have seen more than 3,000 contracts trade hands up to the $125 strike price. Out-of-the-money PUT options down to the $110 strike price have also traded close to 2,800 contracts so far today.
The USO is seeing a bit of elevated trading in its options as well. The gain to $35 has taken the shares above that strike, but the $35 and $36 CALL for NOV-2010 have already traded almost 2,500 contracts combined. The open interest of those two combined was not even 5,000 contracts. The USO’s options trading basis is heavily in the CALLS.
The big trick is whether or not $80 holds as a floor. The prior range many had in mind was to sell close to $80 and buy in the low-$70’s. The first action seems to indicate that a higher floor is being created. Whether that holds or not is something else. As technicians say, “trading ranges work, until they don’t.”
