Media Helps Call Sellers in Supply Laden Crude
News Coverage and a Bump from Seasonal Demand are Again Making Call Sales in Crude a Cash Flow Opportunity
“Oil Prices Rise as US Tanks Drain.” That was the headline of the lead commodity article in the May 18th edition of The Wall Street Journal.
This is the tone the recent coverage crude oil is receiving from investment media as frenzied reporters gape over talk of extending OPEC production cuts and falling US inventories.
US Tanks Drain. Really? Are we running out of oil? Will I be able to put gas in my car tomorrow? After all…Tanks are Draining!
The facts are this. Inventories have ticked lower over the last several weeks. Crude prices have inched higher. But when these facts are put into context, you’ll see how the latest news coverage and public interest can mean cash for you in the coming weeks.
The Real Story: Fact vs. Media Hype
If you’ve been following the latest crude oil coverage, you may be thinking about buying some oil and hanging on for an inevitable spike higher in prices. But a look at the media “scoop” vs. the real facts might change your mind. Lets examine the top ones.1.
Tanks are Draining: It is true that US Crude inventories have declined for 6 weeks running. But draining? Far from it. At the time of this writing, crude oil inventories in the US stand at 520.77 million barrels – an all time record supply for this time of year.
Far from Draining: US Crude Stocks remain at an all time record for this time of year.
In addition, as we pointed out in our March report on Crude Oil, it is normal for crude inventories to decline this time of year. Refineries are in high gear producing gasoline for the upcoming summer driving season. They usually use more crude in the Spring. Refinery operating rates stand at 93.4% up substantially over last years 90.5% and well over the 5 year average of 89.4% for this time of year. However, the much hyped weekly inventory draws have been near 1% or less – a virtual drop in the bucket. The fact that inventories remain at record levels during high demand season is bearish, not bullish.2.
OPEC Production Cuts Will Curb Supply: They haven’t yet. As we pointed out in our March Advisory, US Frackers have ramped up production since news of the OPEC cuts. The latest EIA report shows US production back near 9.3 million barrels per day – the highest since the record levels in 2015. The latest talk of extending the cuts or even increasing cuts may very well come to pass. This will no doubt gain the media spotlight and will be perceived as a wildly bullish development. But it won’t be. The US fracking industry has changed the dynamic in the crude market. OPEC hasn’t solved it and its possible they won’t. A rally to even the mid-50s in crude would bring even more untapped US wells into production.
US Frackers have ramped up production since OPEC announced cuts in late 2016
Additional OPEC cuts could be healthy for the markets and help bring the crude balance back into equilibrium. What we mean by that is that the Overwhelming Supply combined with news of OPEC has taken the crude prices out of their normal ebb and flow of seasonal fluctuation. OPEC helping to cut global supply could take the focus off a glut and put it back on normal cyclical processes. Just don’t expect it to have an outsized impact on price – at least in the intermediate term.3.
Summer Gasoline Demand Will Drive Up Crude Prices: If you’ve read any of our work on energy seasonal tendencies (see OptionSellers.com/seasonals,) you know that price precedes retail consumption. While the media may focus on current retail demand, the futures markets are priced looking ahead. Futures markets are based on wholesale demand. And wholesale demand – as we discussed in item #1 – should be peaking right now as refineries use up crude to produce gasoline supplies for summer. Once summer begins in earnest, however, wholesale demand for crude begins to wane- even as retail demand for gasoline is cresting. This declining wholesale demand often results in weakening crude prices as summer progresses. This tendency is illustrated in the chart below:
Crude Oil prices often wane into summer, even as retail demand for gasoline heats up
Conclusion and Strategy
The media focus on recent developments in the crude market have brought a wave of volume and open interest into the crude oil market – some as a result of the general public wanting to “get in on it.”
The problem is, most of the bull case is a paper tiger. Inventory draws are routine for this time of year and supply remains at record levels. An extension of OPEC production cuts will garner much fanfare but have little real effect on supply thanks to OPECS new rivals in the US.
It is true that prices have rallied over $5 per barrel back towards the $50 per barrel level during the month of May. But that is after a nearly $12 dive in prices since the beginning of the year.
While prices could still have some room on the upside this month, its likely any such move higher will be of limited nature, given the continuing supply issues and the unfavorable seasonal factors now facing the crude market.
We suggest taking advantage of the public interest entering this market. The surge in volume is fattening up call premium nicely! The recent jump in the Stock Market VIX has also helped, spilling into the oil market and helping to spur premiums.
We’ll be putting this advantage to work this month in managed accounts by selling a variety of strikes and using a combination of strategies to adequately balance risk.
January 2018 Crude Oil
Selling the January Crude Oil 65.00 Call
Self directed traders can consider selling the January Crude Oil 65.00 call for premiums of $500 + on a rally this month. We see such rallies as likely this summer as the media has a penchant for talking up “driving season” well after the point.
Keep informed with news updates but don’t get caught up in the hype. Using that hype to your advantage can pay big dividends to the fundamentally informed.
For more information on managed accounts with James Cordier and OptionSellers.com, visit www.OptionSellers.com/Discovery for a Free Investor Discovery Pack (Recommended Account Opening Allocation of US $1 MM)