CEA Monthly Issue – December 2015

| December 16, 2015

***Editor’s Note***  We’re making a minor departure from our regular schedule this month.

In today’s trade alert, you’ll not only find a new recommendation, but also a small update on our open portfolio position.  We’re making this one-time adjustment because the Christmas holiday is fast approaching.

Since the markets always trade on light volume the last two weeks of the year, we’ll be spending this time celebrating the season with friends and family.  We hope you do the same!

Keep in mind, once the New Year is here, we’ll return to our regular monthly schedule.

See you in the New Year!

 

Commodity: Crude Oil

Believe it or not, West Texas Intermediate (WTI) crude collapsed to $35 a barrel earlier this week.  As you may know, that price is just a whisker away from the early 2009 low of $33.55.

With WTI trading at $49 as recently as early November, it’s abundantly clear the past few weeks have been overwhelmingly bearish.

What took crude to nearly 7-year lows in recent trading?

An early December OPEC meeting failed to bring a resolution to oversupply issues that have been plaguing the market since late 2014.

In fact, the Middle East oil cartel likely just made matters worse by increasing their 2016 output quota from 30 million barrels a day to 31.5 million.  The controversial move clearly signals OPEC’s sole focus is still centered on retaining market share.

But here’s the deal…

Remember back to October of this year when we discussed the looming fundamental factors that would help put a bottom in the oil market.

Plummeting US drill rig counts, increasing global demand, and declining US production are important factors that will play an essential role in rebalancing the oil market.

As you may remember from that October update (you can find it in the archives of the members only website), we concluded that the fourth quarter of this year, and possibly the first quarter of 2016, will provide an important tipping point in the oil market.

Folks, we’re sitting smack dab in the middle of that time frame. 

And as oil service provider Halliburton $HAL forecasted nearly two months ago, oil directed rig counts are dropping like a stone in the fourth quarter.  In fact, the most recent reading reveals there are just 524 oil directed rigs operating in the US.

That’s a 12% drop from October and a 66% downturn from last year at this time. 

Clearly, oil explorers aren’t all that interested in drilling at these prices!

Here’s where it gets interesting…

US oil production for the week ending December 4th, 2015 was 9.164 million barrels per day (bpd).  During the same week last year, production was at 9.118 million bpd.

However, last year there were 1,546 oil directed rigs bringing those 9.164 million barrels to market.  But last week there were just 524 operating rigs.  Folks, the last time there were 524 operating drill rigs, US production was just under 6 million barrels a day.

What’s the takeaway?

While US production has been resilient in recent months, it’s just a matter of time before production rolls over and moves sharply lower.  There simply are not enough rigs drilling to keep US production where it is.

The same is happening on a global scale as well…

In fact, energy focused investment banking firm Petrie Partners suggests global production will drop by 4 million to 5 million bpd in mid- to late-2016.

Since the world is currently oversupplied by around 1.5 million bpd, such a drop would quickly rebalance the global market and send the price of oil sharply higher in the process.

Here’s another key factor…

One must always remember that markets are discounting mechanisms.  In other words, they’re discounting future information into current prices.

As a result, we should see the oil market start pricing in looming global production downturns in the not-so-distant future.

Bottom line…

With WTI trading near 7-year lows, we’re very likely within 10% of the final bottom in oil prices.  In other words, the low $30 range will most likely bring a large bullish response from investors.

So here’s what we’re going to do…

For the first time since June 2014, I’m recommending you get long the oil market!

While we may not be at the absolute bottom just yet, we’re not far from it.  Any remaining crude price downturn will likely be limited.  As a result, we don’t have to worry about getting shaken out of this trade.

Here’s how we’ll play it…

Go ahead and purchase the US Oil Fund ($USO) at any price under $11.20.  In case you’re unaware, $USO is a commodity tracking ETF that trades in lockstep with the price of WTI crude.

Now let’s be clear…

You’ll need to be prepared to sit on this position for 6-8 months, maybe more.  That’s the amount of time it will likely take to see the oil market rebalance and prices return to higher ground.

Technically Speaking:

US Oil Fund

 

WHAT TO DO NOW: 

US Oil Fund ($USO) is trading at $11.03 

Buy $USO up to $11.20 per share  

Our profit target is $23.00 or more 

Risk Control Price is not applicable in this trade.  We’re holding our position through any remaining crude price downturn. 

 

Portfolio Update:  Cocoa 

As you know, the iPath Bloomberg Cocoa ($NIB) is our sole open portfolio position.

Cocoa made a valiant effort at higher prices last week as traders priced in the ill effects of El Niño.  Incoming cocoa harvests to key shipping ports in the Ivory Coast (the world’s largest producer) have been below previous year’s levels the past month.

Without question, declining year-over-year West African inventories is a bullish situation.

Alas, the commodity is still stuck below $3,400 a ton, which is an important technical price zone holding the key to higher prices.

Here’s the deal…

The longer cocoa trades just shy of $3,400, the more likely it is we see sellers enter the fray.  As a result, we may see an abrupt wave of selling in coming weeks as technically inclined traders head for the exits. 

Due to this technical development, I’m moving $NIB to a hold.  What’s more, keep your risk control line at $39.09, or 10% below your personal $NIB entry point.

Folks, the bullish backdrop for cocoa is still present.  However, it’s clear $3,400 is a formidable barrier to higher prices.

 

Category: Commodity Trading

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