Crude Oil Moving Lower - But Don't Jump In Yet

September 25, 2007

As predicted last week, Nov. Crude Oil has begun a pull-back from record highs. But don't jump in yet.

Wednesday at 10:30 am EST is when the AIP/EIA Energy Stocks reports come out. Expectations are for crude oil to show an inventory drop of over 2.1 million barrels, which is usually enough for the market to see a slight price increase. This is the head-fake we're looking for. If prices move up a little, the put options we're eyeing will get a cheaper. But, if crude prices start diving after the report, jump on board and get yourself short crude futures or buy crude oil puts.

We like the Nov. 75 puts. They're trading at .67 now ($670), but they expire on Oct. 17. Crude will have to get into the money (come down to $75 per barrel) or very close to that price very soon. I think it can do it. If the crude oil market falls as I think it would (see the end of July), this trade will net from three to four times your investment.

Storms in the Gulf could force crude prices up, but they will have a very short-term effect on pricing. Overall, by Oct. 12 we think crude prices will be in the $75-range. If not, we want to get out of our puts or go flat if short the futures by that time.

Orange Juice Update

Our orange juice trade has moved into the modestly-profitable area. We have Nov. OJ calls with a 1.40 strike price and Jan. OJ calls at a 1.60 strike. OJ futures have moved up from the 1.25 area and are hitting resistance at 1.30. Without any hurricane threats, the market has been moving up mostly on technical buying and some concerns about diseases in citrus groves. http://futuresource.quote.com/news/story.jsp?i=DJC00fjY70925

I expect the OJ market to take a quick breather and probably settle back to the 1.28 area for the weekend. For prices to pop through the 1.30 area and get into the money for the 1.40 calls (which expire in just over three weeks) we'll need some pretty wild weather to hit Florida.

The Jan., calls have until Dec. 21 before they expire, so we can still benefit from some late October weather to allow us to hit our goal.

If you have any questions or comments please send me a note at davidbrown@midwestfutures.com.

Futures and options trading is speculative and involves a high degree of risk. The risk of loss can be substantial. Neither the information presented or any of the opinions expressed constitute a solicitation for the purchase or sale of any commodities.