Option Investor
Commentary

$62, Do I Hear $60?

HAVING TROUBLE PRINTING?
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Oil fell to $62 on Friday before rebounding to close at $63.25. I believe the drop was caused by expiring options on the October contract and the pending expiration of that contract for trading. We see it every month with sharp moves in whichever direction traders were caught with an imbalance. This month they were predominately long in anticipation of hurricanes and conflict with Iran. Neither appeared and traders took large losses.

I believe we will test $60 before seeing any material rebound. At this point it may be a self fulfilling event just to see what OPEC does to support the price. They have made it perfectly clear they will not wait for the next meeting to take action if it is deemed necessary. Several analysts familiar with the people behind the scenes claim Saudi will quietly cut production if we hit $60. That would take several weeks to be felt but once traders feel price supports are being applied that should give us our bottom. Most energy analysts are now quoting $58 as a target low and a buy signal.

The price of natural gas is still in free fall after a monster +108 bcf injection into storage last week. With warm weather fading and cool weather still weeks away this is prime injection season as you can tell by that +108 number. This put gas in storage at nearly 3.1 tcf and very close to the maximum storage levels between 3.2-3.5 tcf. With many weeks to go before any serious draws for heating it is almost a sure bet we will hit that max storage level and gas will backup in the pipeline. This will cause gas prices to plunge as suppliers compete to have their gas taken over someone else. This suggests current contracts for gas could see prices under $4. This has put strain on the December contract, which finally crumbled last week from support at $10. It closed on Friday at $7.75.

The falling gas prices are only temporary and it will eventually work to our benefit. This should push gas producers like CHK and ECA to new lows where we will be waiting to pick them up cheap.

I sent out two updates during the week, which covered some entry points triggered on the watch list and a reader question about the crumbling energy sector. Check your email if you did not receive them. You can always email me your questions at Jim at OptionInvestor.com. I will answer you directly and may answer your questions in the newsletter so everyone can benefit.

I have a question for you today. Do you want me to cover stocks outside the energy sector? I had several emails this week both pro and con as a result of the Thursday night update. For instance I believe the homebuilders have found a bottom and we could add a couple for diversification without much risk. Sometimes no brainer situations appear and there is no reason not to take advantage of it other than clouding our main focus of energy related positions.

I am going to keep this short today since I have a lot of additions to enter this weekend. I am targeting $60 for a couple more entries while we wait for $4 gas to buy gas producers.

Have a great week!


October Crude Oil Futures Chart - Daily

December Crude Oil Futures Chart - Daily

December Natural Gas Futures Chart - Daily

 

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