Just because a commodity is not under the direct spot light does not mean you can’t trade it or make money from it. With that said here is my analysis on how to trade oil if $ 100 per barrel is reached in the coming trading days.

Let’s take a look at the charts…

Long Term Weekly Oil Futures Chart

Here you can see how oil is trading round the $ 100 level. When the price is trading below it then $ 100 will act as resistance and when oil is above then it becomes support.

Intermediate Term Daily Oil Trading Chart:

This is more of a close up look at oil and the $ 100 price point. Notice how oil has moved higher for an entire month without any real pullbacks and that it has a clean support trend line underneath. If oil sees some big sellers step in here at the $ 100 – $ 104 level then I expect the green support trend line to be broken. If that takes place oil could quickly and easily drop back down to the $ 90-$ 92 area.

How to Trade Oil Using an Oil ETF

This chart shows a long (bullish) oil ETF along with its price by volume levels. I like to review the price by volume analysis from time to time when nearing a major support or resistance level on a chart. For those who have difficulty finding support and resistance levels then this indicator/volume analysis tool will take most of your guess work out of the equation.

To make a long story short, the longer the volume bars on the left side of the chart are then the more people either bought or sold crude oil at that price. Keep in mind that it does not matter if they bought or sold here… the key to remember is that there are a lot of new positions here and that is where people exit their positions at breakeven because they held such a large draw down over the past few months and just want their money back.

Most traders and investors who trade off pure emotions (fear/greed) would have held a losing position through the August – October selloff and are now going to be more than happy to exit the trade at breakeven and move on to the next emotional roller coaster. It’s this type of trading which allows the non-emotional traders who thrive off of price action and mass psychology to catch price swings in the oil market.

The chart below clearly shows that oil is entering into resistance level and a pullback is becoming more likely each day. Those looking for an etf how to trade oil should look at buying SCO ETF. This oil ETF goes up in value when oil loses value.

How to Trade Oil and Oil ETFs Conclusion:

In short, oil is becoming overbought meaning it has moved up to far too fast and should have some profit taking shortly. The fact the oil is reaching a century number ($ 100) I feel there will be a couple days of selling starting soon. Traders looking to play this support trendline breakdown should look at trading SCO oil etf.

We believe that this is an extremely significant event as the typical U.S. E&P hedges more than 50% of their coming year’s production in advance, often telling investors that they are “trying to be conservative” and reduce risk.

The reality is that they are utilizing the forward curve to improve earnings and cash flows. The hedging programs in place at natural gas E&Ps have contributed as much as 50% of their operating cash flows over the past five years, making gas E&Ps equal parts hedge funds and natural gas producers.

The current five year average contango between the 12 month forward natural gas price and the spot price is 21.93% (ie, on average over the past five years, the 12 month natural gas futures contract has been priced 21.93% above the spot price).

Prior to 2005, the 12 month forward futures price was, on average, equal to the spot price, as the following chart, depicting the % contango between the 12 month natural gas futures price and the spot price going back to 1991 shows (the pink line is the five year average):

We believe that the natural gas forward curve will continue to flatten, as the forward curve represents investor sentiment toward long-term gas prices and sentiment has finally become fairly bearish (although not yet as bearish as reality).

This will make life very difficult for natural gas E&Ps as we move through 2012 and they work their way through the majority of their remaining hedge books put in place when 12-month forward gas prices were 20%+ above spot prices.

As you can see on the above chart, the current contango between the 12-month natural gas forward price and the spot price is 11.73% and falling…

Investment Conclusions

While it is tempting to run out and short a basket of U.S. E&Ps, there are a few complications that must be addressed.

The first is that with the current 27.2:1 ratio of spot oil to spot natural gas prices, even a relatively small amount of liquids production can substantially change the economics of a “gas producer.”

For example, Chesapeake Energy (CHK) produces 83% of their BOEs from dry gas, yet generates 52% of their revenue from dry gas at current spot prices.

Cabot Oil and Gas (COG) generates 95% of their BOEs from dry gas, but only 81% of their revenues at current spot pricing.

This substantially narrows the number of “gas” E&Ps. In addition, some E&Ps (Sandridge, in particular) have taken to creating Royalty Trust/MLP vehicles –- carving out gassy assets and selling them to retail investors at absurd valuations, raising substantial amounts of cash.

This game will continue into 2012.

Lastly, some E&Ps are rapidly switching their production from gas to oil.

Chesapeake, for example, has decreased the percentage of their production that comes from dry gas from 90% in Q3 2010 to 83% in the most recent quarter.

The following table lists the major U.S. E&P’s, sorted by the percentage of their production (in BOEs) that currently comes from natural gas (from least to most). It also shows their production mix a year ago (Q3 2010) to allow for comparison, as well as the percentage of revenues based on current production that would come from natural gas using $ 3.50 natural gas price realizations and $ 94 WTI crude realizations.

You’ve seen the headlines. The Northeast was hit by a Nor’easter snowstorm that affected 60 million people. Over three million were left without power and outages to last for days. New York City received its earliest inch of snow since the Civil War. Pennsylvania, Washington DC and the entire Northeast were buried in as much as two feet of snow and then hit by freezing weather.

The Northeast is not the only cold area. Even Texas, already drought-stricken, had snow this month in Amarillo. The Rocky Mountains, including my home 300 miles from the Mexican border, has been buried in white stuff two times in October. Sunny California started the month with heavy rain in the Fresno valley (hammering the drying raisin crop) and snow for the ski resorts in the Sierra Nevadas. And it is all due to hot water and cold, cold air.

We are being hit by a La Niña and a “wild card”. Welcome to the early beginning of the winter of 2011/2012.

The Official Forecast

On October 20, the U.S. Climate Prediction Center issued its outlook for the winter of 2011/2012. It focused on the recent arrival of a new La Niña in the tropical Pacific and the impact of that phenomenon on American weather. However, it warned that the frozen polar air of the Arctic Oscillation could be a “wild card”. Let’s look at this prediction.

The government forecasters see a schizophrenic winter. According to the annual Winter Outlook released by NOAA the Southern Plains will continue to be warmer and drier than normal, while the Pacific Northwest will be colder and wetter than average. From December through February, the entire southern tier of states will have below normal precipitation, while the northern states will have above normal snow from the Pacific through the Great Lakes. The same northern region and the West Coast will have below normal temperatures. Meanwhile, the Mid-Atlantic States and the Northeast will be near normal. After last winter’s blizzards, the forecast will be a relief to New York and Pennsylvania.

The forecast warns that the major “wild card” in this projection is the Arctic Oscillation. In the NOAA’s words:

The Arctic Oscillation is always present and fluctuates between positive and negative phases. The negative phase of the Arctic Oscillation pushes cold air into the U.S. from Canada. The Arctic Oscillation went strongly negative at times the last two winters, causing outbreaks of cold and snowy conditions in the U.S. such as the “Snowmaggedon” storm of 2009. Strong Arctic Oscillation episodes typically last a few weeks and are difficult to predict more than one to two weeks in advance.

The Browning Newsletter agrees with much of this analysis. The La Niña in the Tropical Pacific will be a dominant factor shaping this winters weather. However, we routinely include other factors, some of which will trigger the “Wild Card” Arctic Oscillation to plunge abnormally far south for a third year in a row.

The La Niña Factor

Last year, one of the major factors that created last year’s cold winter in North America was a strong La Niña.

This year’s La Niña will be stronger!

A La Niña is when the Tropical Pacific is 0.5?C (0.9?F) cooler than normal. A moderate La Niña is around 1.0?C (1.8?F) and a strong event is 1.5?C (2.7?F) cooler than average. Last year the La Niña hovered between 1.5? and 2.0?C (2.7? ? 3.6?F) all winter long. It began to weaken in January and was officially gone by June.

The Tropical Pacific began to cool again in late August and by mid-September, officials declared a La Niña condition.

It will have to continue for 5 weeks in a row to officially be declared a La Niña event. As Figure 6 shows, water temperatures can flicker into warm El Niño or cool La Niña territory. However if it doesn’t last for multiple months, then there is no long-term significant impact on climate.

What is the impact of the current La Niña?

The strong La Niña traditionally strengthens the South Asian monsoon. This has caused the massive flooding in Thailand. The event both strengthened and prolonged the nation’s wet season, causing the worst flooding in 50 years.

These floods are going to have a major global economic impact. Southeast Asia is the main source of rice exports. According to the October 25th edition of the Wall Street Journal, Thailand has had 12.5% of its total rice farmlands damaged in Thailand alone. In Cambodia, 12% of paddy fields have been destroyed, with another 7.5% in Laos and 6% in the Philippines.

Additionally, Thailand manufactures one-fourth of the world’s hard drives and half of the HDD for PCs. The floods have shut down more than 14,000 factories and forced at least 660,000 people out of work.

Closer to home, the return of La Niña has prolonged the drought in the Southern US. 100% of Texas, more than 85% of the South Central states and more than 53% of the Southeastern states are in drought. Ranchers are cutting back their herds across the Southern Plains. While in the short run this will reduce beef prices, it will take years for the herds to recover. Prepare for the price of your hamburger to rise.

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The combination of a hot Atlantic and cold La Niña waters in the East Pacific coastline, sets up a pattern of winds that tend to steer tropical Atlantic storms straight into Mexico/Central America or up the middle of the Atlantic. This steers the storms away from the US oil and gas production fields in the Gulf of Mexico. During the short intermission between the last La Niña and this one, Irene ripped up the Atlantic Coast and TS Lee shut down more than 60% of the Gulf ’s oil production and 40% of gas production.

Going back to Asia – the summer disappearance of La Niña allowed Northern China to have an excellent corn crop. The reappearance of La Niña is creating wet harvest conditions for huge areas of the crop. Since China lacks an efficient, nationwide cold storage transportation network, the result will be high spoilage rates and poor quality for those goods finding their way to market. Last year’s autumn La Niña created some of the same difficulties including disease and vomitoxin in feed, have still not fully been resolved. China is still catching up on grain supplies. This return of the phenomenon will increase the nation’s problem, and we will see the problem become more severe through winter into spring.

Currently scientists are divided on how strong this event will grow. There is a consensus that this episode will last into spring. Initially most models projected a weak event but the majority now forecast a moderate event. Figure 8 shows the wide diversity of international opinions while Figure 9 shows NOAA’s Climate Forecast system’s models which have one of the best forecast records. Notice, the CFS model thinks the upcoming La Niña will be stronger than the one last year!

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Here’s the main point. El Niños and La Niñas are the water temperatures. The associated air/weather pattern is called the Southern Oscillation. The severity of the water change and the associated weather usually go hand-in-hand, but not always. Two events are going to enhance the strength of the Southern Oscillation. The first is that the Northern Pacific is undergoing a cool phase of the Pacific Decadal Oscillation. The PDO will be discussed more in the next article, but it magnifies the weather impact of La Nina. The other event is that we will be having “volcano weather”, increased winter cooling from the effects of two Artic volcano explosions this year.

In short, even if the La Nina is only moderate, it will have the global impact of a strong event!

The Outlook for Winter

Consider the early, record-breaking snowfall this year a warning. This will be a winter of Nor’easters. It will be a winter of blizzards. There is a lot of volcanic dust in the polar air mass and the “wild card” negative Arctic Oscillation will carry it south. It will collect moisture and fall out in blizzards.

There have been very few years like this year, but the most similar years had the following weather patterns:

LATE AUTUMN — The cool weather will continue to dominate the West Coast as autumn ends. The Northwest and western Canada should experience an early onset of winter with cool, stormy weather. Meanwhile, in 60% of similar years, the Northeast has a cool, wet late autumn. Temperatures will be warmer than normal in the center of the continent.

EARLY WINTER — Early winter is when the weather really starts to get chaotic. Cool western weather will crash into warm Southeastern weather and the Central Plains, Midwest and Northeast will endure storm after storm. Meanwhile in 80% of similar years, Western Canada and the Pacific Northwest have heavy snows and coastal rains. In 60% of similar years, the storm track surges further south, leaving large portions of Canada warmer than normal.

MID-WINTER — Mid winter can be described in two words – cold & stormy. Normally the South is dry, but the larger this winter’s La Niña is, the more likely it will be that there will be rain in the central and western Gulf States. Unfortunately in all 5 similar years, Texas, Georgia and parts of the Southeast suffered severe drought.

The outlook for this winter can be summed up in one phrase ? Every natural factor that shaped the last year’s cold winter is back. Winter will not be an exact duplicate, but typically years with extremely similar factors have a roughly 70% similarity. Think what you should have done last winter and do it now.

from King World News:

With continued turmoil in global markets and gold remaining firm in the mid $ 1700s, today Michael Pento, of Pento Portfolio Strategies explains for King World News readers globally why a full-blown bond market crisis is coming in 2012 and how investors should prepare, “The European debt debacle continues to unravel and yet many investors fail to recognize the profound ramifications of taking the largest economy on the planet offline. EU 27, which has a GDP north of $ 16 trillion, is the largest export destination of some of the world’s fastest growing economies.”

Michael Pento continues: Read More @ KingWorldNews.com