Weekly Update: October 15, 2014

| October 15, 2014

Weekly Update: October 15, 2014


Big Picture Outlook:

No doubt about it, the past month has been one to remember…

Not only did WTI plummet to $80 a barrel, but the entire oil and gas industry has essentially crashed.

Case in point, the SPDR Oil & Gas Exploration & Production ETF (XOP) is down 35% from the highs set in June.

And believe it or not, XOP is down 25% in just the past month!

With the broad markets down approximately 8% from the recent 52-week highs, it’s quite clear oil and gas stocks are suffering the worst.

What’s all the commotion about?

Not only is European economic growth slowing, but recent reports from the Middle East suggest OPEC is prepared to accept oil prices in the $80 range for an extended period.

Given the OPEC news (which I am highly suspect of), investors have basically abandoned small-cap energy names.  Of course, mid- and large-cap names have suffered extreme selling over the past few weeks as well.

While it may be tempting to bet on more downside, I think most of the damage has been done to oil names.  The long list of energy names I watch are so undervalued it’s silly.

But believe it or not, the downturn in oil is only partly to blame…

The broad markets are currently experiencing a wild bout of volatility thanks to the Ebola scare.  I won’t rehash the headlines here, but there’s no question investors are reacting in an overwhelmingly bearish fashion to this ongoing development.

What do we do with all this information?

Even though oil and gas stocks are wildly oversold, we have to be very careful betting on upside in these names.  Nearly every chart I look at has a ‘falling knife’ look to it at the moment.

Situations like these are very challenging to capitalize on from the long side.

We need to see the broad market and oil stabilize before betting on an energy industry rebound.

The same goes for mining stocks…

Even though gold and silver have gained in recent sessions, it’s still a bit too risky betting on upside in miners given the extreme selling in the broad markets.

You have to remember, one of the safest places to be when the markets become irrational is on the sidelines! 

Capital preservation is key in times of market turmoil…

That’s precisely why our trades have been a bit few and far between the past few weeks.  But rest assured, when I see the right conditions, we’re going to jump on opportunities quickly!

Let’s get to the 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.

. . . . Penn Virginia (PVA) October 17, 2014 $15 Calls

Well, it’s fair to say PVA has been pummeled over the past few weeks.  The Eagle Ford producer has dropped to the $7 area, which is 50% lower than where it traded in early September.

This is the prime example of just how irrational the markets have become over the past few weeks!

But there is an upshot…

PVA gave us gains of 50% in our $15 calls before falling apart.  What’s more, PVA hit our $13.00 risk control line weeks ago.  As a result, conservative investors should have closed this trade long before the aggressive downturn.  And even if you chose to keep this trade open, your downside risk was limited to what you paid for your call contracts.

Bottom line…

By trading call options instead of holding PVA stock, you saved yourself from massive losses.  Of course, with expiration on Friday, this trade is officially closed.

. . . . Whiting Petroleum (WLL) October 17, 2015 $110 Calls

Here’s another one that fell out of bed…

After running to within $0.08 of our $93 profit target and giving us gains of 88%, WLL collapsed to $53 in recent trading.  That’s an eye popping 42% downturn in one of the top Bakken producers.

It’s sheer madness…

WLL and other top-tier Bakken names are so incredibly undervalued right now it’s hard to imagine them trading any lower.  Alas, our WLL calls are expiring in two days, so consider this trade closed.

. . . . Occidental Petroleum (OXY) January 16, 2015 $110 Calls

Clearly, OXY is not reacting well to the recent purge in the oil and gas industry.  The international producer collapsed to $83 in erratic trading today before rebounding into the close.

Of course, conservative investors should have closed this call trade when OXY hit our risk control line at $95 a few days ago.

If you’re aggressive, OXY should rebound heavily in coming weeks as investors realize oil won’t stay at $80 a barrel forever.  And the best part is, we still have plenty of time remaining until expiration.

. . . . ConocoPhillips (COP) January 16, 2015 $80 Calls

Here’s another great example of why our risk control line is so important.  COP succumbed to heavy selling as oil and the broad markets turned sharply lower this week.

But conservative investors should have jettisoned this trade when COP sank below our risk control line at $72.50 last week.

If you’re aggressive, consider holding your calls for a rebound.  We still have plenty of time left until expiration.

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 CustomerService@CommodityTradingResearch.com.  I’d like to know how you’re doing!

Category: Commodity Trading