Weekly Update: December 3, 2014

| December 3, 2014

Weekly Update: December 3, 2014

 

Big Picture Outlook:

No doubt about it, it was an absolutely horrific week for the US oil and gas industry. OPEC’s unexpected decision to keep 2015 production at 30 million barrels a day sent the entire complex into a tailspin.

Not only did the price of crude plummet to $64 a barrel because of it, but US oil companies (especially shale explorers) succumbed to heavy selling in recent trading.

Take top-tier Bakken explorer, Continental Resources (CLR) for example…

CLR is down 30% on the week. What’s more, the past few month’s downturn has CLR shares a whopping 50% off the recent 52-week high set in late August.

Those are shocking numbers.

And believe it or not, the entire small- and mid-cap oil exploration industry is posting similar performance. As I mentioned in yesterday’s trade alert, the only companies weathering this storm well are the large-cap integrated companies like Exxon Mobil (XOM) and Chevron (CVX).

What can we expect from the oil industry going forward?

It’s going to be a long process for the crude market to find equilibrium. Analysts are throwing around price projections from $30 a barrel all the way back up to $100.

But listen closely…

The oil market is entering new territory. It used to be an investor could make a great risk/reward bullish trade when crude dropped to the bottom of a long-term trading range. After all, you knew OPEC would be willing to cut production if prices got too low.

That’s over now.

For the first time in 40 plus years, OPEC isn’t controlling the global oil price through production. That means all these wild projections are nothing but guesses.

Truth is, it’s going to take quite some time before the oil market finds equilibrium and stabilizes. Until then, we’re likely going to see continued extreme volatility in the oil market.

But keep in mind…

Despite the uncertainty, there will be trading opportunities from the long and short side in oil and gas names in coming months. As long as we stick to good risk/reward trades, there’s still plenty of profit potential in the oil industry.

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.

. . . . US Natural Gas Fund (UNG) January 16, 2015 $21 Calls

Forecasts for an extended period of warm US temperatures has natural gas back on the defensive. The commodity is back below $4 mmBtu, trading at $3.79 as I write.

Remember, UNG hit our first profit target at $23.50 on November 7th, and again on November 20th– giving us gains of 200% on our $21 calls.

If you’re still in these calls, I suggest you close them while you can. While we may see a rebound in natural gas soon, you should never let a winning trade turn into a loser.

This trade is officially closed.

. . . . US Oil Fund (USO) December 19, 2014 $32 Calls

No doubt about it, OPEC’s decision killed this trade. If you were aggressive and held through last week’s historic OPEC meeting, there’s a 99% chance these calls will expire worthless.

As a result, this trade is officially closed.

. . . . Ultra Petroleum (UPL) January 16, 2015 $25 Calls

Despite the fact UPL is a natural gas producer, shares are plunging on OPEC’s decision. With crude trading at 5-year lows, there are growing concerns that highly indebted energy companies will have a hard time staying afloat.

Investors are likely looking at UPL’s high debt load and betting the company has problems staying liquid. Honestly, I don’t foresee it being a problem for the company. But we simply can’t argue with the overall market, which is convinced UPL is in trouble.

If you were aggressive and held through the OPEC decision, it’s best to take your lumps and move on.   This trade is officially closed.

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

The sudden oil downturn is leaking into other commodity markets. The price of Uranium Oxide is pulling back below $40 a pound in response to OPEC’s decision.

While I suspect the selling in Uranium is a temporary reaction, we have to respect what it’s doing to CCJ.

The uranium miner hit our risk control line at $17.49 this morning. If you’re conservative, you may want to close this trade to conserve capital. If you’re aggressive, keep holding your CCJ calls for a rebound. We have plenty of time until expiration. Our profit targets are at $22.00 and $24.00.

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

Unfortunately, the ongoing energy industry rout is indiscriminant. Much like UPL, CHK is suffering an abrupt downturn thanks to OPEC. The natural gas producer hit our risk control line at $21.80 last Friday. As a result, conservative investors should have closed this trade last week.

Given the extreme bearish sentiment in the energy space right now, only very aggressive investors should be holding these CHK calls for a rebound.

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

It’s been a challenging week in the energy markets folks.

Thankfully, we caught a quick trade in XOM yesterday to get back on the right track. XOM moved quickly, hitting our first profit target at $94.50 just a couple hours after the trade alert was sent out.

Thanks to the rally, our February $92.50 calls jumped to $4.25 a contract- a 23% gain within a day. As a write, XOM is still trading over our first target, so feel free to take profits off the table.

If you’re aggressive, keep holding your XOM calls for our second target at $96.00!

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