CRUDE OIL UPDATE: OPEC Headlines the Gift that Keeps on Giving to Call Sellers

CRUDE OIL UPDATE: OPEC Headlines the Gift that Keeps on Giving to Call Sellers
Sep

25

2018

CRUDE OIL UPDATE: OPEC Headlines the Gift that Keeps on Giving to Call Sellers

Sunday’s Meeting in Algeria Has the Press Abuzz – But it Changes Little in Long Term Fundamentals

OPEC is back in the news, crude oil is back in the $70’s and the talking heads are again predicting $100 oil.

So what’s new?

I’ve been hearing this OPEC argument for a year now and it has had little effect other than to bump oil prices $5-$10 one way or the other. As a crude oil trader, I would expect that to continue. Predictions of $100 are, in my opinion, misguided – and that is using a nice word for it.

OPEC Holding off output hike

OPEC: Holding Off on Output HIke


Sunday’s OPEC meeting in Algeria resulted in major oil producers ruling out an additional immediate output increase . As some in the trade were expecting an additional 500,000 barrels per day (bpd) increase, this was viewed as bullish. In addition, news of an attack on an Iranian military parade has geo-political bulls on this week.

My take on this is that it changes nothing. For a bigger picture view of crude, I recommend watching our latest interview with TD Ameritrade which features our Crude Oil Outlook.

The bigger picture is important because “stories of the week” can often create opportunities for longer term investors. This may be one of those.

OPEC – The Other Headline

OPEC, for its part, simply left current production levels as is . And at this point, this is at least adequate. What the headlines missed was that OPEC also said non-OPEC nationproduction was seenrising by 2.4 million bpd while global demand was seen rising only 1.5 million bpd. This is likely a key reason OPEC is not eager to bump production right away.

OPEC must walk a tight rope between trying to squeeze as much revenue out of its oil as it can without tipping over the global economy (thus killing the golden goose.) That sweet spot for this seems to be somewhere in the low to mid $70 range.

Graph - EIA weekly Crude Oil

At 394 million barrels, US Oil Stocks are back to near seasonal norms.


Meanwhile, US producers pumped a record 11 million bpd last month while US supplies have come back to seasonal norms after a summer shortfall.

Graph - EIA weekly Crude Oil

US Oil Production hit a record 11 million barrels per day last month.


Seasonal Headwinds

As you may know from our video seminar on seasonal tendencies , energy markets can see cyclical ebbs and flows in demand that can have an outsized impact on price. These cycles often coincide with the seasons of the year.

In crude oil, autumn marks the beginning of shoulder season. Shoulder season is a period of lower demand as driving season in the northern hemisphere has ended, while heating season has not yet begun. This has historically tended to correlate with a decline in the price of crude oil lasting in to mid-winter. The chart below illustrates this tendency. (Past performance not indicative of future results.)

Graph - Jan Crude Oil 5yr seasonal

Oil prices have historically tended to decline into mid-winter as demand tends to weaken into autumn.


Conclusion and Strategy

It is important to monitor daily headlines in the crude market. But it is also important to put them in proper perspective. Be careful not to get carried away with media frenzy, which in 2018, is easy to do. OPEC news gets viewers whipped up. Interviewing the guy calling for $100 oil makes a good “pulling” headline on the blog.

But its media cotton candy.

$80 oil likely starts to press the world economy . $100 oil probably blows it up. OPEC has no interest in doing that.

Oil Field sunset

Global Oil supply/demand appears balanced. But a push to $80 could destabilize the global economy.


The global oil supply picture is nearly balanced now. OPEC is happy with prices where they are and doesn’t want to unleash extra supply flow unless it has too. They have one eye on US producers and the other on the global economy.

Can oil rally into the upper 70s? Sure it can. Don’t know if it will, but it can. We would be surprised if it went higher than that. The more likely scenario is a leveling off or slow but steady drift lower into winter.

The good news is, the latest rally is keeping oil in the news. And that brings out small speculators. And small speculators LOVE to buy calls. This increases demand and thus premiums from call options.

I don’t like predicting what prices will do – too hard. But I do not believe crude oil prices can reach $100 anytime soon – not with stable oil fundamentals, record US production and a seasonal headwind blowing down on the bulls.

June 2019 Crude Oil

GRAPH: June2019 Crude Oil


Selling the 100.00 Call


For that reason, selling speculator inflated call premium at the $100 strike seems like easy cash at this point.
We’ll be pricing a number of strikes and months for oil call premium for our managed portfolios in the coming weeks.

Self directed traders can consider selling theJuly Crude Oil $100 call option for premiums of $700 or better should prices continue to rally. With margin requirements near $1600 per option, ROI is attractive.

I’ve always believed one could make a living simply by fading the news. For those who follow that path, crude oil’s headlines remain the gift that keeps on giving.

James Cordier is author of McGraw-Hills The Complete Guide to Option Selling and head trader of OptionSellers.com, a wealth management firm offering managed option selling portfolios to high net worth investors. For more information on managed option selling accounts with James and OptionSellers.com, visit www.OptionSellers.com/Discovery for a Free Investor Discovery Kit (Recommended opening deposit US $1 M.)

  1. Hi Michael,

    In this article suggested selling July Crude Oil $100 call option for $700 approximately. But in TDAmeritrade they don’t have contract beyond April 2019 (CLJ19). Which broker provide July 2019 contract?

    Thanks for the nice article.

    • Michael Gross Says:
      October 19, 2018 at 8:31 am

      Ram,

      I am not 100% familiar with the platforms of other brokerages. You might try Interactive Brokers. Or call TD Ameritrade and see if there is any expanded option windows you can access. Or, you can subscribe to a private commodity quote service such as CQG.

      Thanks and good luck.
      Michael

  2. your advice has been good thus far, although I only started with you in August 2018

  3. Edward Parise Says:
    September 28, 2018 at 10:30 pm

    I like your commentaries very much—good, logical info.

    Have looked on internet for fundamental info services for crude, softs, etc but unable to find much of anything. This blog provides info but would be nice to be able to subscribe to services as you suggest in your book. Can you provide a list of credible fundamental info vendors? Would be much appreciated by many. USDA is good but no info on OJ, Coffee, Cocoa, etc that I could find.

  4. Paul Scurko Says:
    September 26, 2018 at 12:32 pm

    Jim and Mike, you guys are spot on. Thanks for the insight on how to trade CL in the near future.

  5. Gentlemen: Your insight and constructive thinking never cease to amaze me. Thanks to you I believe that some of it has rubbed off onto me as my trading style has shown improvement. I am still working on building up the amount of capital required for eligibility to become one of your regular clients. My sincere thanks to you.

  6. James Treptow Says:
    September 25, 2018 at 3:11 pm

    Upon checking the Jul 19 call option premium it appears to be in the $400
    range not the $700 range suggested above. Are you assuming that the cash
    price of WTI continues to increase fairly significantly when you make that
    ‘prediction’ on premium price? How much higher?

    I certainly like the idea of selling deep out of the money calls, but I find your memos
    somewhat misleading because the premiums often quoted are for 10-12 months out,
    vs. the suggested strategy of 90-120 days out. Can you help me understand??

    • Michael Gross Says:
      October 2, 2018 at 11:45 am

      James,

      We are continually tweaking and updating our approach to make it the most efficient it can be in relation to current market conditions. As of late, we have been having more success selling the longer dated options, with an eye on taking profits 2-6 months early. This of course, can often be the case if the option has shown significant decay. If market conditions evolve, we may shift back to the shorter dated strikes. This does not mean that selling shorter dated strikes is a bad idea at this time. Quite the contrary, the strategies described in our book are timeless. We are simply always looking for the slightest edge in any part of our trading. It just so happens at the current time, we feel the longer dated options offer us a slight edge.

      Regards,
      Michael

  7. Michael Frassica Says:
    September 25, 2018 at 2:12 pm

    I’m new to options and still trying to learn futures. However, I am studying Option Sellers book and watched just about every youtube video from you all. I like your no nonsense approach to the subject. Great stuff, thank you.

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