Oil Getting Crushed, Exit Shorts Now
Oil prices fell more than $3 intraday to $70.10 despite a potentially dangerous hurricane headed directly for the Gulf oil fields. The reason for the sell off is the broader market selling by hedge funds. Yesterday, August 15th, was the notice day for investors who want out of their hedge fund investments on Sept-30th. This gives the funds 45 days to complete an orderly disposition of assets to cover those withdrawals and is supposed to allow investors to exit without any material damage to other investors in the fund.
Unfortunately many of the assets currently held by hedge funds are not trading or are trading at such low values that funds can't afford to sell them. Most analysts believe most funds received massive redemption requests and many may not be able to raise enough cash to cover the withdrawals.
When you can't sell what you want to sell you are forced to sell what you can and that means equities and futures. In our case that means crude futures and energy stocks. Those investments have been the strongest sector in the market for the last year and most funds have lots of money invested in this sector.
Today they are dumping everything and the arrival of a hurricane headed for the gulf is not even enough to halt the dumping of positions.
This is a great buying opportunity for us but I believe there is additional selling ahead. Friday is option expiration and all those put options will need to be closed. Positions covered by those puts will have to be analyzed to decide if they want to continue holding the position and buy new puts or just close the positions and go to cash.
I expect some extreme volatility as we near the close today and again tomorrow. Monday could see an attempt to buy the dip but we need to wait for the all-clear signal before jumping back in. If hurricane Dean does build in strength and head for the oil patch it should not hit until Tue/Wed of next week. That gives traders time to exit August positions and still enter new oil positions next week before the hurricane hits.
National Oilwell Varco (NOV) one of the stocks on our watch list was knocked for a -$10 loss intraday and hit our entry point at $100. This is strong support and a decent entry point.
With the hurricane headed our way and crude down -$3 for the day to $70 I am going to recommend we exit our energy shorts in CVX, TSO and XLE.
The XLE profit target was $62 and it is trading as I type this at $63.24. We currently have a $5.70 profit on a $3 option or +187%. Exit now at $8.70.
TSO is trading at $43.25 and our profit target was $37.50. If the hurricane does blow through the Gulf and knockout refiners TSO could benefit strongly. Exit the position now at $8.10 for a +131% profit.
CVX is trading at $79.30 and decent support that does not seem to want to crack. It will also benefit from hurricane elated refinery outages even though it does have refineries at risk in the gulf. Exit now at $12.50 for a +166% profit.
Without the hurricane I would recommend holding those positions but the risk has shifted to the upside and we need to take our profits and move to cash until it passes. I will have some new watch list entries on Sunday to take advantage of this dip.