Weekly Update: December 10, 2014

| December 10, 2014

Weekly Update: December 10, 2014

 

Big Picture Outlook:

Another week of crashing crude…

West Texas Intermediate (WTI) is on the verge of crossing below $60 in today’s session.  As I write, the commodity is down $2.99 on the day, trading at $60.86.

What’s sending oil down so quickly?

This morning’s EIA report revealed a surprise 1.5 million barrel build in US crude inventories.  What’s more, OPEC is forecasting sharply lower global oil demand for 2015.

Add it all up and oversupply fears are running rampant.  Overly bearish analysts are calling for crude to drop to $50 a barrel or lower in coming months.

Personally, I believe the selloff in crude is completely overdone. 

Remember, markets are a discounting mechanism.  In other words, they discount future information into current prices.  In my opinion, the oil market has already priced in the majority of next year’s oversupply issues.

And that’s not all…

Crude is on the verge of falling below the $60 price point Saudi Arabia recently said would be the bottom of the market.  If oil keeps freefalling into the $50 range, watch for an emergency OPEC meeting in early 2015.

Bottom line…

I firmly believe this massive downturn in the oil market is nearing an end.  As a result, I’m leery of buying puts in oil names that are already down 50% or more in the last six months.  The risk/reward simply isn’t in our favor to bet on additional downside in oil names.

Let’s get to our open position updates…

 

Portfolio Highlights:

Just a quick note: I won’t update every open position every update.  I focus on the positions with significant news or price movement.

. . . . Cameco (CCJ) March 20, 2015 $20 Calls

CCJ fell out of bed the past week.  Despite the fact uranium pricing has barely budged from last week, CCJ is dropping to the October lows at $15.50.

Investors are likely reacting to an early December press release where the company announced a shelf filing.  In case you’re unaware, a shelf filing means Cameco intends to raise capital at some point in the near future.

The capital raise could be in the form of a secondary stock offering, which will dilute current shareholders- hence the selling.

Unfortunately, this unexpected financing news is throwing a big wrench in our March $20 call trade.

While we still have plenty of time left in this trade, only aggressive investors should be holding these calls for a bounce.

. . . . Chesapeake Energy (CHK) January 16, 2015 $24 Calls

There’s just no escaping the bearishness in the energy industry right now.  Not only is crude crashing, but natural gas is nose diving thanks to an extended bout of warm December weather.

As a result, there’s literally no place to hide in the energy industry.  As you’ll see in a minute, even the major integrated oil and gas names are heading south.

Since CHK hit our risk control line in early December, only aggressive investors should be holding these calls for a rebound.

. . . . Exxon Mobil (XOM) February 20, 2015 $92.50 Calls

After jumping to our first profit target at $94.50 last week, sellers ganged up on XOM the past few days.  The world’s largest oil company has lost over $6 a share since we last spoke.

Now remember, since XOM hit our first target, conservative investors should have already been out of this trade with a small profit last week.

Even if you’re aggressive and still holding these calls, you may want to consider closing this trade due to the fact XOM hit our risk control line at $89.80 today.

If you’re extremely aggressive and willing to throw caution to the wind, these calls don’t expire until February 2015.  As a result, there’s plenty of time for XOM to turn back to higher ground.

. . . . Barrick Gold (ABX) February 20, 2015 $10 Puts

ABX popped as high as $12.50 in today’s session before turning lower.  The sudden reversal to higher ground comes on the heels of a $40 rally in gold since Monday.

Keep a close eye on our risk control line at $12.75 in ABX.  If the miner rallies above that point, conservative investors should consider closing this trade to conserve capital.

But unless the risk control line is triggered, keep holding these puts for a return to lower prices!

Until next time,

Justin Bennett

Remember, if you’d like to comment on how you’re doing in the service, or if you have any questions or concerns, please feel free to drop me an email at [email protected].  I’d like to know how you’re doing!

Category: Commodity Trading