The stock of integrated oil and gas company TotalFinaElf S.A (NYSE: TOT) recorded a high of $50.75 on Wednesday. The announcement of a production cut by the OPEC members and the investors’ expectation of better refining margins for the company aided an appreciation in the share price. On November 30th, we had suggested binary traders invest in a high or above contract, with one week expiry period, to gain from the probable run-up in the price. Total was trading at about $46.50 when we gave our suggestion. On December 6th (our recommended expiry time), Total closed at $48.24 thereby leaving the contract in the money. We now believe that the stock would undergo a price correction due to the reasons given below.
The oil price is no longer heavily dependent on the production of OPEC’s member states. The US became the world’s largest producer of oil in 2014, although Saudi Arabia has taken the numero uno position once again in 2015. From a mere 5.1 barrels per day in 2006, US crude production has increased to 9.4 million barrels in 2015. The overall crude production has increased from 90.4 million barrels in 2013 to 97.2 million barrels in the third quarter of 2016.
The increase in production took place when the oil price was falling from $90 per barrel to less than $50 per barrel. Thus, the agreed production cut of 1.8 million barrels per day is not going to bring a lasting change in the price of crude oil. In fact, compared with 2015, the production of crude oil has decreased only by 535,000 barrels a day. More importantly, the number of rigs in the US has started rising recently. So, the analysts believe that the ‘Big Oil’ is not going anywhere. Thus, fundamentally, it is advisable to use the recent rally in the share price of the major oil company to go short.
Technically, the stock is struggling to go past the minor resistance at $50.70. The main line of the MACD indicator has also crossed below the signal line. Thus, we can anticipate the share price to decrease in the coming days.
A trader can speculate on the downtrend in the stock by picking up a put option (low or below) contract from a binary broker. The trade can be entered as long as the stock trades near $50 in the cash market. As we suggest usually, a one week time period should be chosen for the expiry of the contract.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
