Option Investor
Commentary

A Lot Can Happen In A Week

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We closed on Friday the 28th at $71.85. Monday and Tuesday were strong with oil prices running back to $74.95 on various geopolitical concerns and the rising gasoline prices. Wednesday's inventory levels showed an unexpected build in crude of +1.7 million barrels. Suddenly, after eight weeks of declines a build appears and the bottom fell out of the contract. Thursday saw crude find a bottom just below $70 and at potentially strong support. Geopolitical concerns were still appearing like popcorn but it was a stalemate between buyers and sellers. $70 held and another weekend break from trading gave our blood pressure a rest.

What a hectic week! Energy earnings were still appearing at random and Tidewater (TDW) had the unfortunate honor of being the scapegoat for the sector. TDW disappointed analysts even though they posted strong earnings. This served to further complicate the energy picture only one day after drillers were downgraded again by over active analysts running short on research.

Repeat after me. Nothing has changed in the long-term energy outlook. Feel better? We know prices will always be volatile and we know that there will be a pause before Memorial Day. Hopefully this was it. Once the driving season begins to kick in and inventory levels begin to decline the price of oil should resume its upward path.

On the geopolitical front South America is turning to the left and the future of energy production and exports from that arena is becoming very cloudy. Venezuela production has fallen so drastically without new investment they had to contact to Russia for 100,000 bpd to run their refinery in Germany. Fortunately it was easier for Chavez to buy it from Russia and ship to Germany than reduce his exports to the U.S. and ship it across the ocean.

Hurricane season is only three weeks away and AccuWeather is predicting another tough season and a season that could see storms impact Long Island and the Carolinas.

See the Option Investor wrap this weekend for further details on South America, China, Russia and the hurricanes.

What do we do now? With crude resting on $70 and even stronger support at $65 I am in dip buying mode one more time. Nearly every reputable energy analyst is predicting $80 before $60 and some are even saying $90 before summer is out. Since some of our long calls are summer options we need to start looking for an exit. Some with monster gains like BTU, SLB, DO, VLO and PCU are begging to be exited but I still think there is a higher high in our future. Since pigs get fat and hogs get slaughtered I am going to target $80 crude as an exit point on some positions, especially those with shorter-term options. For those with LEAPS we will target a fall exit but start tightening stops just in case disaster strikes.

Natural gas has found a new range with $6.50 as support on the June contract and $10.60 on the December contract. Inventory built at a less than expected 53 bcf last week but inventory levels are still +59% over five year averages for this time of year. Summer cooling season is just ahead and with temperatures already over 100 in the south it promises to be a hot one. Inventory injections will be watched closely over the next seven weeks and any further declines in anticipated injections could get the price moving very quickly.

Coal is hot and getting hotter. BTU is coiling at $70 and could breakout at any minute. Console Energy (CNX) and Arch Coal (ACI) are also on a steep ramp. ACI has a 2:1 split on May-15th and CNX has a 2:1 on May 31st. BTU has split 2:1 twice in the last 14 months and both times at $100. With the stop at $70 again nobody can complain about that type of return.

On Friday Iran announced they could now mass-produce centrifuges needed to enrich uranium. Since nobody would sell them the devices with the world spotlight so brightly focused on Iran they had to develop a way to make them internally. This is a major step in their nuclear development. The P5, the permanent members of the UN Security Council, plus Germany met on Thursday to go over the draft of a binding resolution to force Iran to stop their project. The completed draft is expected to be reviewed again at a dinner meeting on Monday and the group is looking for a vote the following day. The draft calls for Iran to cease uranium enrichment and suspend construction of a heavy water reactor by early June. The Franco-British draft invokes Chapter 7 of the UN Charter, which can authorize economic sanctions or even military action to enforce compliance. Since Iran does not respond well to threats or demands the situation could escalate quickly once the resolution passes. Russia and China have said they would not vote for any resolution that called for military action and that is causing some heated discussion of the Chapter 7 clause. Russia and China are barely agreeable to sanctions and the extent of those sanctions should they come to pass will be another challenge to get passed.

For the coming week I expect Wednesday's inventory numbers to be more critical than normal and I expect another decline in crude. If that does not appear then we may test $65. Iran is the wild card. If they start getting blustery earlier in the week then higher prices will result.

Check out any play you are currently holding as stops may have changed. We had a lot of earnings activity and several outlooks have changed.

I did not add the exit targets for $80 oil but will email an update if we start closing on that level. It could be several weeks away.


Oil Service Index - Daily

June Crude Oil Futures Chart - Daily

December Crude Oil Futures Chart - Daily

June Natural Gas Futures Chart - Daily

December Natural Gas Futures Chart - Daily

 

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