Option play: Is crude done?

May 11, 2015 12:53 PM

In the face of U. S. record supply of the black gold, crude oil prices soared on news of Cushing, Okla., and Baker Hughes.

Fundamentally, crude oil supplies are at record levels here in the United States and globally, yet prices climbed this past week on news of rig and supply counts at places like the Cushing and Baker Hughes facilities. What a complete joke, in my opinion. I have been making trade recommendations with options on crude oil as a registered series 3 broker since 1998 and this market never ceases to amaze me. I can remember my first week in the business when I was glued to my DTN quote screen as the low ticked at $9.98/barrel. I dialed the phone and told prospects to buy calls because we were going to $12 and people hung up the phone on me, basically telling me I was crazy. Oh, happy day! It was all about OPEC then.

Now, in the crude market there is much more to consider besides just OPEC--like Cushing and Baker Hughes. As rig counts dropped and production here in the United States fell back and the market jumped higher at the start of last week's trading. Then when the Energy Information Agency's (EIA) report on Wednesday showed a decline in production of 3.9 million barrels, breaking a 17-week streak of supply builds, prices rallied to a new high for the move for 10 minutes after the report, only to sell off back below the $60/barrel mark to end the week. This was surely a "buy the rumor, sell the fact" kind of trade. I also wondered how it was very irrational for the market to ignore these supply numbers. It went up when supplies were high, then down when supplies were low. That is not the basic law of supply and demand, is it?

Anyway, it is difficult to predict where prices will go from here with a poor ADP jobs number on Thursday and great non-farm payroll jobs number on Friday showing a big improvement leaving our great nation with a 5.4% unemployment rate down from 5.5% previously. Who do I believe, because surely these numbers should have an impact on demand-yes? If there are folks getting great-paying jobs by the thousands then they could go on vacations this summer and drive and fly sucking up all this oversupply of oil if I believe the non-farm numbers. Or do I believe ADP, which showed a mere 167k in new jobs? I'll go with the ADP report on a fundamental basis. I look for crude oil to maybe consolidate for a little then re-test the lows, again going back down to possibly $35-$40/barrel before the end of the year. Why? Because I'm old fashioned and I do believe in the basic law of supply and demand. 

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About the Author

Matt McKinney is a full-service options broker at Zaner Group both buying and selling energies, metals, grains, softs, currencies and the 30-year bond market. My strategies include time frames of 45-120 days with the ability to liquidate at any time. I can be reached at mmckinney@zaner.com.

Whether you're a novice trader who wants to participate in options on futures or an experienced trader, you can also check out my blog at http://www.mmckinneyfutures.com/.