Why oil’s next big move could take it higher

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Crude oil settled down almost 2 percent Tuesday, hitting a two-month low around $43 a barrel. However, one trader says the options market indicates that a large move higher may be ahead.

Stacey Gilbert, head of derivative strategy at Susquehanna, said oil trading continues to be a high-volatility environment. And while crude could see more losses, she said, any big move is more likely to come to the upside.

"Although oil can clearly go lower, the one thing the options are saying is that the larger moves, we're talking moves of 15 to 20 percent, they are slightly favored to be more to the upside than to the downside," Gilbert said Tuesday on CNBC's "Power Lunch."

Indeed, many market professionals see a sharp spike in crude oil as more likely than a continued decline. They reason that the drop in crude comes from heavy supply and somewhat weak demand, and that those dynamics are unlikely to get even more bearish from here.

An employee directs a vehicle toward gas pumps at a China Petroleum & Chemical Corp. (Sinopec) gas station in the Zhujiang New Town district of Guangzhou, Guangdong Province, China.
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However, a jump in crude could be spurred by a worsening geopolitical situation in the Middle East that will lead to questions about supply; if a so-called geopolitical premium creeps back into oil, a sharp spike could be in store.

According to Phillip Streible of RJO Futures, crude oil is on its way to breaking below the $40 level to $38 a barrel. That would be another 12 percent drop from where crude oil settled Tuesday.

"This bear market is starting to accelerate," he said Tuesday. "Oil prices are going to go the path of least resistance and that looks to be lower right now."

The Baker Hughes rig count for the U.S. remained unchanged on Oct. 23 from the week before, after seeing seven straight weeks of declines.

But while the decline in the rig count may seem bullish, foreign imports of oil have surged, offsetting the drop in U.S. production, Streible said.

According to its most recent report, the U.S. Energy Information Administration saw crude oil imports increase to 7.5 million barrels per day in the week ended Oct. 16. "At 476.6 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years," the report said.

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