Option Investor
Commentary

Frustration Factor

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Last week produced so much frustration it was enough to make me want to jump out a window. The final market plunge on 11/21 knocked us out of a record number of positions last week leaving the portfolio almost bare. The rebound from those lows has been amazing and the Dow recovered +1380 points. Crude prices appear to have stabilized over $50 and energy stocks have been moving higher. That is where the frustration appears.

I continually remind readers that the majority of the gains from a major market rebound come in the first few days of the rally. After the first week or so the combination of profit taking and hesitance about buying a breakout tends to slow the progress of the advance. For the last three months I tried to keep us invested as we bought numerous dips along the way. Last week's plunge cleaned out the portfolio and this week's rally produced those remarkable gains I warned about. Unfortunately we were mostly flat after being stopped. In the table below I took some of the positions we lost and compared the closing price on Friday with the stop price from the prior week. As you can see the gain from the rebound is painful to look at. Unfortunately the market rarely telegraphs its intent and the big gains are from short covering from traders caught flat footed looking the wrong way. It is painful but we must suck it up and move on.

Stop loss table
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OPEC is meeting this weekend and nobody really expected a production cut after the OPEC president said it would not happen. He said it was too early to determine the impact from the November cuts since many countries had not yet implemented those cuts. I can understand his frustration with the calls to cut production again since making the 13 countries in the cartel do something is harder than herding cats.

Late Friday an OPEC member heading into the weekend meeting told reporters a production cut should not be ruled out. That helped push prices to $57.24 in late trading.

I seriously doubt they will cut at this meeting but I would definitely expect a 1.5 mbpd cut at the Dec-17th meeting in Oran. OPEC will have the full month production numbers for everyone and will be able to slap specific members down for not enforcing the cut. You can bet there will be a lot of finger pointing at the meeting this week. If your nation cut production by 100,000 bpd at a cost of $150 million to your budget and you knew somebody else had not done the same I would expect some tempers to flare. With only 13 countries there is little hope the slackers can hide in the crowd.

I believe OPEC will cut production at the December meeting. I believe the low price of fuel will produce a quick rebound in demand around the world. I believe the global recession will ease significantly by the end of the second quarter. That is about the time the global inventories will have corrected from the Nov/Dec production cuts and crude will be fairly priced again. As we head into the summer hurricane season I feel pretty confident prices will be significantly higher. I am guessing around $70 but that is just a guess.

Because most traders realize OPEC and the other oil producing nations cannot continue to sell oil at $50 when the marginal cost of production is $57-$62 on the low side and as high as $72 for deepwater wells and hostile geographies, the price must go back up or production will drop significantly. The worst thing that could happen for Peak Oil would be a continued languishing of prices at $50 or lower. Exploration would slow to a crawl. The build out of fields and infrastructure and target dates for new production would be put off for years into the future. The arrival of Peak oil would actually be hastened by lower crude prices. I will cover all the reasons why in my year end report.

I included a couple of energy plays this weekend where I recommended buying the stocks instead of the options. The stocks have gotten so cheap an option simply made no sense.

I am not going to rush to rebuild the portfolio because we could see oil prices decline again if OPEC does nothing this weekend. I am also expecting a possible general market decline as we move into December. The first week of the month has been negative for the last three months but that is not what I am expecting. I think we will see some simply profit taking but the bears will pile on to see if they can force the markets lower. Time will tell but I still think the bottom is behind us.

Jim Brown

January Crude Futures Chart - 120M
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Jnuary Natural Gas Futures Chart - Daily
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December Gasoline Chart - Daily
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