Cordier to TD Ameritrade: Oil Could “Tip Over” in Fourth Quarter


Sep

14

2018

Cordier to TD Ameritrade: Oil Could “Tip Over” in Fourth Quarter

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(Video Transcript)

Record Production Opens Opportunities for Crude Oil Call Sellers

James Cordier, September 13, 2018

Ben:

Welcome back to “Futures with Ben Lichtenstein,” with hurricane Florence a category 3, battering into the east coast, some bullish inventory numbers and continue to unease related to geopolitical uncertainties. The energy markets have been big this week and yesterday we saw the WTI, which traded to within 20 cents of the August high. I’d like to welcome in James Cordier to “Futures with Ben Lichtenstein,” James is the President and Founder of OptionSellers.com and he’s here with us to talk energies. James, thanks for coming on the show, great to have you back, I want to get into some of the influences on price activity mentioned a minute ago but first I want to talk about shoulder season because we’re starting to hear a lot about it. If you will explain to our viewers what it means when we say the U.S. northern hemisphere is now entering into shoulder season and how does it typically impact price?

James:

Good morning Ben, certainly shoulder season is becoming more and more well known, as traders start trading, getting more involved with crude oil and gasoline prices. Shoulder season is the end of driving season, generally this starts taking place late September early October, and shoulder season is then capped on the other side by the beginning of heating season. So the months of October, November, December, especially if we have a mild winter, very little demand in the United States for energy. It really does fall off the table starting in the next 2-4 weeks, and quite often, if you follow seasonalities in the energies and they don’t work every single year, this year is shaping up to be quite well for that to continue happening. We often see crude oil prices fall off anywhere from $5 to $15 as we approach the 4th Quarter, and with a bit of a crescendo happening right now in the energy market and the price basically hitting a high yesterday. Shoulder season is setting up extremely well for a dip in prices starting probably this week or next.

Ben:

So, James from the notes you sent, it looks like you dialed in on the current U.S. gasoline stocks, which are at 236 million barrels. That’s the highest level for September since records have been kept going back to 1990. Is this because of the wide profit margins that we’ve been hearing about from the refiners? I mean last I heard, they were pushing back some of the seasonal maintenance in order to take advantage of price at these elevated levels.

James:

That certainly is why gasoline supplies in the United States are so high. We keep seeing supplies in the United States come off like we did with the report yesterday, some 5 or 6 million barrel draw yesterday, but more importantly, gasoline stocks continue to climb and for that reason, we did hit a record, for this week, for this time of year, for gasoline stocks, and U.S. consumers aren’t buying crude oil, they’re buying gasoline, and with stocks at all-time record highs for September, just another, I think, bearish point as we enter the 4th Quarter for both gasoline and crude oil prices.

Ben:

James, is this one of the reasons, I actually just pulled up this RBOB chart here, I’m wondering, it’s certainly been coming off a bit recently we’ve been actually watching some lower highs as it’s come off that high from back in, looks like the middle of May, is this one of the reasons why it’s been holding near this $2.00 level do you think?

James:

I think it is Ben, quite often when prices are being supported globally, possibly through Brent and not so much here in the United States, you’ll notice that gasoline has a divergence with it’s chart, not making the higher highs like crude oil has been, gasoline has certainly been a lagger and that is setting up for what we expect lower prices led by gasoline as we enter October and November, a very small demand season for gasoline.

Ben:

James how about U.S. production at all-time highs about 11 million barrels per day, but recently we heard of a report which stated that they expect production to slow. Now, relative to prior forecasts, talk to us about some of the constraints which prompted them to revise their projections, was it, I think it was the IEA, was it issues related to distribution and infrastructure or is this more of a demand story?

James:

It is distribution right now. Oil can be produced for $40 to $45 a barrel but if we can’t get it to where it needs to go I think a lot of producers are holding off just a little bit on spending more money. Infrastructure has to take place and we’ll probably have that happen as we move forward, we have a very energy conscious administration right now, and I think producing oil and being self-sufficient is very much on their radar stream. Production, not only in the United States which hit a new high of 11 million barrels, something that just came out, with all the troubles in Venezuela, all the troubles with Iranian oil coming offline, we hit 100 million barrel production in August, an all-time high, and what’s interesting about both OPEC and non-OPEC nations, they don’t create technology, they don’t make fine wine they pump oil. And, I think we’re going to see Venezuela pump oil again probably in the next year or two, and what’s interesting is about Iran, possibly half of those barrels are offline right now. I think what’s going to happen a little bit later this year is Iran is starting to now float oil on the seas in container ships and that oil is going to find a home, and usually how this happens and we’ve seen this before, Iranian oil, which is offline right now, there’s going to be an owner for that and how that happens is let’s say we have $80 Brent, all of a sudden that Iranian oil is for sale for $75, $73, and $71 and all of a sudden there’s a taker, and all of a sudden we have a little bit of a price war, and that coupled with shoulder season I think is going to possibly tip this market over in the next week or two.

Ben:

James I’m assuming that’s why you think the call selling is the best option strategy at this point for our viewers is that correct?

James:

Ben, we’re not market timers even though it does feel like a bit of a crescendo right here and we want to take long-term fundamental views with world production hitting all-time highs in August, all-time record highs for production here in the United States, we think that going short oil by selling calls at the $90 level. You want to go out and be very patient like we are you want to sell one year, you can sell $100 oil right now, and by selling those calls, your timing doesn’t have to be perfect, you have about a $40 leeway between here and the strike price, and while that’s not sexy selling $100 oil, possibly not for day traders certainly, I think it’s an excellent idea, I think we’re going to see that pan out quite well.

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