Option Investor

Really, We Are Cutting!

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Last week I wrote that OPEC could not get any respect because nobody really believed they were going to make that 2.2 mbpd cut happen. This week both Saudi Arabia and the UAE have told buyers to expect less crude next month. Crude prices rebounded slightly on the belief that maybe somebody would actually cut production as promised.

This is a tough week for me. I am expecting another dip in crude prices but I want to be long energy stocks. I don't believe for a minute that the UAE news was what moved the market. I believe it was short covering on low volume before the weekend that moved prices. Nobody expects the rest of OPEC to actually follow through with the announced cuts. They might get a half hearted 50% over the next three months but it won't be enough to really impact prices.

The futures are still in strong contango with the December contract still over $51. The front month contracts are likely to drop further because there is simply no storage space for additional crude and they either have to sell it or store it and that second option is becoming increasingly hard to do.

I have reported for over two years that 2009 would be a tough year for oil prices because of the volume of new supply coming to market. The global recession could not have hit at a worse time. We needed oil consumption to increase in 2009 to offset the increase in production and it is simply not going to happen. We should steel ourselves that oil prices are not going to improve materially until the recession passes.

Fortunately most energy stocks have either quit falling or the rate of decline has slowed. It may be too early to call a bottom but I think we can see it from here. With oil stocks selling for pennies on the barrel for reserves this is pure value. With many of the smaller companies now under $10 it makes it even more attractive. However, I do believe we will see oil in the $20s so the time is not right to load up on energy stocks.

I spent about six hours this weekend researching low dollar stocks. I believe I found some winners but there is no rush to add them to the portfolio. I added 10 stocks to the watch list this weekend and I have 10 more for next weekend. I am hoping to catch some entries on a market breakdown in early January. If the market blasts off next week I am going to look very silly with a pile of breakdown entries and nothing triggered.

The next ten days should not be about energy but about market internals and cash flow out of funds. Historically fund flows are normally positive for the next two weeks but this has been an historically bad year and investors may not be rushing to put more money into stocks just yet. In fact I am afraid they will be looking to pull money out of stocks once the 2008 tax year passes.

The VIX trade is nearly over. I was planning on exiting this weekend but I decided to wait another day or so. If we get some year-end window dressing the VIX could drop to 40 and that is my target to exit. I lowered the stop to 47 just in case.

I considered adding a short play to capitalize on any market drop between now and Jan 10th but decided to focus on buying the dip rather than trying to capture it. I believe our interests are best served in establishing long positions on a retest of the November lows instead of shorting that drop. Let your own conscience be your guide.

There are only THREE DAYS LEFT TO check out the end of year renewal special. There is another crude oil video and two special reports on energy.

Click here for the full package description

Jim Brown

February Crude Futures Chart - Daily
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Natural Gas Futures Chart - Daily
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January Gasoline Chart - Daily
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