Trading Plan for Royal Dutch Shell Oil

Trading Plan for Royal Dutch Shell Oil

Last week saw the oil market making dramatic moves as it bounced more than twenty percent in a week, only to fall another ten percent – all in one day!

The reason for these wild swings are attributed to speculation, as well as a weaker Chinese PMI (Purchasing Manager Index) release that meant that the economy in China was not doing that well. The Chinese economy being a manufacturing based one, this implies demand for oil will be lower in the near future as well.

Royal Dutch Shell (AMS:RDSA) cannot be happy about this because, like any company involved in the oil business, lower oil prices represent a real challenge for the future of the company.

According the recent forecasts, the demand for oil will still be in place for some time now, however, at different levels, namely at lower levels. Factors that make supply bigger than demand are weaker economic growth on the global arena, (as mentioned at the start of this article), as well as an increase in output as the tacit war between OPEC members and US shale oil producers is ongoing. As a consequence, the world is facing an economic slowdown now, met with oil inventories & oil production levels at the highs.

That being the case, it is no wonder that prices are expected to stay in the same range, (somewhere between €30-€40/barrel). Oil companies need to take that into consideration when planning future changes in the way the company is operating.

In the case of Royal Dutch, the technical analysis picture is bleak as well. Prices have dipped from above €30 in August 2015 all the way down to €22 now, and this is coming in as a so called impulsive move – so more moves to the downside is expected.

In an impulsive move, the most likely extended wave is the third wave, and in this case the extension should go more than the €20 level. Also, we should have some alternation between the corrective waves and this means that by the time the €20 level is broken, the fourth wave should be simple, as the second one was complex. This implies a dip even lower in prices so the downside is the path of least resistance.

Therefore, I am favoring a put option for the Royal Dutch Shell, from current 22 Euro area with an end of September expiration date. This also means that both the ECB and Fed interest rate decision will influence the outcome of this option.

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