Buying opportunity WTI crude oil

September 14, 2010 12:32 pm

An increase of the central bank’s target interest rate (currently between 0% and 0.25%) probably will not occur until the second half of 2011. According to the Fed, “the pace of economic recovery is likely to be more modest in the near term than had been anticipated”. The FOMC stated that the Fed will reinvest principal payments on its mortgage holdings into long-term Treasury securities, thus driving Treasury yields lower.

The statement that the US central bank policy makers will keep interest rates low for “an extended period” amid signs that the recovery is slowing, spooked investors. Investors probably reasoned that this development will push demand for oil down. Crude oil prices slumped in August, which the chart of West Texas Intermediate Light Crude Oil Future illustrates.

Investors being bullish over the price development of oil, could however be strengthened in their confidence by the positive forecast of the Organization of Petroleum Exporting Countries. Opec boosted its global oil demand forecast for 2010 and 2011 as emerging economies in Asia, the Middle East and last, but not least, Latin America will push consumption higher. According to the oil cartel, worldwide crude oil usage will increase by 1.05 million barrels a day (or 1.2%) in 2011 year to an average of 86.56 million barrels a day. Although Opec added that oil demand growth will remain “moderate” due to uncertainties about the recovery pace of the global economy.

This year, the WTI several times recovered from the $73-level. Currently hovering approximately 9% above the $70-level, a bullish call on WTI could be profitable, with a favourable risk/reward-ratio of 1 to 3. If the WTI manages to recover to $93 per barrel again, this ‘bet’ implies an upside potential of almost 20%.