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.

Irrational Crude Oil

September 18, 2007

The crude oil market is once again acting irrationally. Goldman Sachs came out with a piece saying crude could hit the $85 to $100 per barrel point very soon. That alone is usually cause for us to take the opposite side and short this market.

Aat the end of July, I started writing about crude hitting new highs for no apparent reason. We said buy the 70 put options, and if you did you made a very nice return. We're watching for a set up to repeat this trade.

On Wednesday, Sept. 19 the API/Energy Stocks inventory report comes out at 10:30 am EST. There is a good chance the report will show a larger than expected draw down on crude supplies, mostly due to the Huston Ship Channel shutting down for Humberto last week. This could cause a one or two day spike in prices, followed by another sharp move down.

A 50% move down from today's high ($81.11) to August's low would place the Nov. crude oil contract in the $75 range. A Nov. put option with a $75 strike closed today at .83, or $830. If crude oil falls back to this price range within one or two weeks that option would be worth over $2,000 - a pretty nice return for a quick, short-term trade.

We are bearish on crude for these reasons: world inventories are high; the Middle East is relatively calm (Ramadan just started); there have been few storms to disrupt the Gulf shipping lanes and finally, we're winding down out of the gas-guzzling months.

What could mess up this trade: interest rates falling could give traders a reason to think we're suddenly going to start using a lot more oil since the economy will pick up the pace; a big hurricane hitting the Gulf or slowing imports from Mexico; Mid-East troubles and finally, hedge funds continuing to bid up the contract.

Irregardless, we want to buy our puts in the .70 to .80 range, looking for a first goal of of the market hitting $75, then $70. This should give us a two-times investment return on the first leg and a three-to-four times return if Nov. crude can get back to $70.

We are still bullish on natural gas and heating oil. Nat. Gas is a good seasonal play this time of year thanks to Gulf storms, and heating oil is expected to be in shorter supply this year, as we said in the "Battle for Acreage" post on Sept. 11.

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.

OJ Trade Triggered; Storms Brewing in Gulf & Atlantic

September 13, 2007

We finally pulled the trigger on the Nov. OJ calls, picking up some 140 strikes for 1.95 each (a real crappy fill that didn't get executed until the end of the day - even us brokers can get crappy fills).

OJ jumped in price over 4% thanks to a combination of a new storm brewing in the Atlantic (the creatively titled Tropical Depression #8) and the new hurricane Humberto (springing out of nowhere, it's about to clobber Galveston and roll up into Louisiana and Alabama. Some tracks have it possibly coming into Florida, but most have it staying north). Commodity funds also saw the recent lows as good buying areas and have pushed prices through buy-stops, while producers are looking for a better area to start selling.

Looking at the chart from the NOAA, TD #8 looks like it could make a direct line for Florida. Or it could veer off to the north, south, or dipsy-doodle under Cuba, sneak into the Gulf and come in though the back door. Who knows? But, the threat is there, so as traders we want to be on the right side of the market.

The Nov. calls we bought expire on Oct. 19, so we need this trade to get legs soon for two reasons. First, time decay starts to take a bigger and bigger chunk out of the option's value as we get closer to expiration and are still out-of-the-money. Second, the USDA is releasing its projections for the 2007-2008 crop on Oct. 12, and it is expected to be higher than what the trade would like. This has the possibility of making for a volatile week. I would rather be sitting on the sidelines counting my earnings from this trade instead of being in it that late in the game.

This is also a good time to look at the natural gas trades. NG was up about $1.00 yesterday, and Humberto and TD #8 will certainly cause prices to continue to climb in the near future. We were suggesting put options on RBOB gas, but Humberto could cause some refinery disruptions. RBOB Oct. futures jumped back over $2.00 per gallon on Wednesday on these fears.

Finally, crude oil jumped for no apparent reason after OPEC said it would be raising its quotas. But, as zman's Energy Brain reported: "So why the early price uncertainty… The early uncertainty was the apples and oranges nature of the statement. In true Fed-fashion the powers that be in OPEC confused everyone. "500,000 that's built in, let's rally this thing" warred against "1.4 million! Holy Crap!"

…Followed by the spike into the close? Ultimately traders went for the record after the close, deciding that OPEC wouldn't be able to meet the additional 0.5 million by in a little over a month and a half. At least these are the current theories out there. Oil closed at $78.23, a new record for a front month NYMEX contract.

I think we test $80 soon. It of course depends on a variety of factors including the inventory report and what the IEA has to say about global oil demand in its report today, but I think we're going to knock on $80 and then fall back into the mid to low $70s over the next few weeks."

I might be looking at Nov. or Dec. crude oil puts in the $70 strike-price area very soon. Should cost in the $1,000-range.

Wheat (Finally) Tumbles

So the USDA comes out with its new crop production and supply demand reports. This country is about to become swamped in a sea of corn. So what does the market do? Push prices higher by 15-cents per bushel. Wheat supplies are reported to be so tight that we'll have near record low ending stocks and the wheat market does what? It ends the day down 30-cents. (Great for us since we have wheat puts, but very unexpected).

Why the wacky price movement? Fingers are pointed at soybeans, which we think are slated for the $10 or higher point very soon. The USDA says the crops are coming in with less yield than expected, Brazil is having issues with it's crop, and acreage is being taken away from soybeans in favor of corn and wheat.

If we can get the May '08 soybean contract to come back to the $9.20 area, we will take the latest Hightower Report recommendation and buy, with a goal of $10.23. They suggest a stop at $9.04, which equals a risk/reward of $800 to $5,000 (or a ratio in the area of 1:6, which is what we look for in a good trade.) Initial margin for soybeans is $2,430, while the mini-soybean contract is $486.

In the meantime, we will continue to monitor the wheat market and pile up on puts if it keeps sliding down.

If you would like some of the other recommendations from the last Hightower Report, send me an email 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.

OJ Trade Still On - Here's Why

This from Dow Jones Newswire:

"The gains this week (in orange juice futures) have been attributed to technically linked buying, concerns over a tropical weather system in the Atlantic Ocean and media reports about citrus-greening disease in Florida, analysts have said. Short covering after FCOJ futures had fallen to 23-month lows last week was also cited for the gains.

"Traders are keeping an eye on a broad area of low pressure associated with a tropical wave about 1,250 miles east of the Windward Islands. Conditions appear favorable for development and the system could become a tropical depression within a day or two, the National Hurricane Center in Miami said. While the storm doesn't appear to pose an imminent threat to Florida's orange groves at present, traders will continue to monitor the forecasts for possible strengthening, a broker said."

I also saw a NOAA chart showing a new possible tropical depression in the Gulf of Mexico off Texas.

The Dow Jones story went on the say that "continued liquidation in FCOJ futures has finally taken speculators to a net-short position, the speculation and hedging report on Sept. 7 showed. Specs are net short by 813 contracts, or 2.9% of open interest, from being net long 1,238 contracts the previous week. With Monday's rally, open interest actually fell 27 to total 28,201 contracts, proving that the move was done largely on short covering." (My emphasis).

We are still looking at the Nov. 140 OJ calls (trading at 1.20, or about $180.00), and the Nov. 160 OJ calls (trading at .75, or about $113.00). However, these options expire on Oct. 19th, so time is running out. Unless the OJ market makes a big up move very soon, we're going to move out to the Jan. '08 options. The Jan. 140 calls are 3.50, or $525.00 while the Jan. 160 calls are 1.60, or $240.00. These expire Dec. 21.

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.

Battle for Acreage

September 11, 2007

Wheat, corn, soybeans and cotton will all be battling for acreage next spring as farmers try to decide which crop will provide them the biggest dollar return for their work.

This spring it was corn - fueled by record prices, falling ending usage numbers and strong forecasted demand, led by ethanol. But the farmers' dreams of $4.00 per bushel corn may be far in the past. Corn is currently trading in the $3.40 range, which is not bad considering it is usually in the $2.00 to $3.00 neighborhood.

But who can go wrong with wheat, now pushing an eye-popping $9.00 per bushel? Expectations are for farmers to switch their acreage in hopes of basically printing money. When farmers do this, however, it opens up a number of new trading opportunities.

First, there will be a shortage of corn, soybeans and cotton next year. The Hightower Report today released a special report called the "Battle for Acreage," (if you would like a copy send an email to davidbrown@midwestfutures.com). It outlined several trading strategies for the coming year. If wheat and cotton grab acres away from corn, we'll have a shortage of corn and soybeans.

Prices for 2008 crops are still a little too high to start trading. We'll be buyers on pull-backs, and would most likely use futures rather than options as the time-premium for the strikes we're looking at are almost the same as futures margins.

Crop Report Out Wednesday Morning
The World Ag Supply & Demand report from the USDA is due out at 8:30 am on Wednesday. There are expected to be few surprises. Corn yields are expected to up, which may depress corn prices for the short-term. Wheat yields in the U.S. are expected to be up also, but worldwide demand is expected to create one of the smallest ending stocks ever, pegged at round 373 million bushels (which sounds like a lot, but evidently is not).

Wheat may continue to rise, pushing above the magic $9.00 per bushel price tag and eyeing the coveted $10 club. Every single newsletter I read, however, says that this market has to start moving down as harvest gets more underway. Also, much attention has been shifted to Australia's drought in some wheat-growing areas (other reports have some areas claiming record production, however), and all eyes will be on if they get any rain in the next two weeks. Some weather reports say yes while others say it will not be enough to boost yields.

Anyway, I'm still jumping on Dec. '07 and March '08 wheat puts when this freight train finally slows down. I would also think about spreading, buying Dec. '08 corn and selling Dec. '08 wheat, but the margin is still higher than I would like (pushing $1,700 initial). Whatever happens, it should be an interesting day!

Heating Oil Shortage?
Saw a great story on zman's Energy Brain's website that distillates used for heating oil are at record lows. This coincided with the heating oil contract setting new highs. With several refiners getting ready for maintenance breaks, he does not see the supply pipelines for heating oil to begin filling very soon. We would be buyers of heating oil contracts (or call options) on the next pullback on this contract.

Hurricane centers say there is some new tropical storm activity, and this could help natural gas jump in price as well. As reported in the last post, we are very bullish on natural gas. The market is finally moving up off some severe lows, and a storm threat could be enough for our option contracts to see a nice pop.

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.

How High Can Wheat Go?

The above is a monthly chart of wheat prices going back to 1993. Notice the circle drawn around the (at the time) record high prices in the $7.50 range way back in 1996. Also notice how far and how fast wheat prices dropped through the floor. Are we set to repeat that same price action?

Quite possibly. Yes, there is tremendous world-wide demand for wheat, and that's set prices sky-rocketing to new record heights. The U.S. and Canada are among the few countries in the world that is experiencing a fantastic wheat harvest, and all the other countries are knocking on our door to tender purchase offers.

Once the buying is done and the harvest is complete prices almost always start falling. In the last few days there have been more stories that the wheat crop is coming in larger than expected, that Australia's drought isn't as bad as expected, and new seeding in Canada will be over double what it was this year. Therefore, I'm buying put options on wheat futures.

Last week we picked up a few Dec. $6.40 puts, and will adding more if wheat prices continue to move down from the highs. Wheat had two limit-up days this week, and finally profit taking and slightly bearish news sent prices downward Thursday, and in pre-market we're seeing prices down nearly four cents. I'm looking at all puts with a strike price from $7.00 to $6.40, and will also be looking at March '08 puts in the same strike range. These puts are quite a bit more expensive, but, like the Dec. puts, I'm looking for at least a five-time return on my investment.

The wheat market is still going to be a roller-coaster for the next month. I would not go short the futures just yet - those two limit-up days would have set your account down at least a total of $3,000 per contract - so options is the way to go. Strap yourself in - this is going to be a fun ride.

Energy Update:

Unless Israel goes to war with Syria, look for crude oil prices to come back down fairly quickly. There is still little in the way of hurricane news to disrupt pipelines. API/EIA oil, gas and distillate inventory data showed slightly larger drawdowns than expected, but that usually means next week's number will out-of-line the other way - meaning they will report larger inventories than expected, driving down prices.

I would still be a buyer of crude oil and RBOB gas put options.

For natural gas, however, I would start watching for signs of an up-move and look at going long or buying call options. Chesapeake Energy released a press release stating that it will cut production by about 6%. The company did not say why it was curtailing production, but the fact that natural gas is near its lowest point since September 2004 could have something to do with it. Look for other natural gas drillers to follow suit (just like the OPEC cartel!) With less natural gas being produced, prices will naturally begin to rise. Is it just a coincidence they curtail production as the heart of hurricane season arrives? Not likely.

I would look at the Dec. $9.00 natural gas call. It will set you back about $3,000, but the charts show $9.00 is a good area that natural gas was trading for the past few months. And, if it gets back to the $10 area, where it was during the early summer, you would make a very worthwhile return on your investment.

OJ Update

Nov. OJ futures set a new low on Wednesday, then bounced back to finish the day in positive territory. Thursday saw a slight up-tick, so we'll keep a close eye on this contract in case we finally found the bottom. We're looking at the Dec. 160 and Dec. 140 calls, which finished yesterday at .50 and .95 respectively.

I think a lot of the up-move was caused by the new tropical depression that is trying to form off Florida's northeast coast, but the maps show this would probably be more of a threat to New York than to the citrus groves.

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.

Season for Energy Trades

September 3, 2007

With Fall approaching, now is the time to look at the energy markets for some quick, short term swing trades. The crude oil, RBOB gas and natural gas contracts tend to be very volatile at this time of year, fueled mainly by the devastation hurricanes cause in the Gulf of Mexico and the Gulf coast.

Often, just the threat of bad weather will send energy futures climbing. But, just as prices soar at threats of production shut-downs, they also drop back very quickly when the pipelines start working again.

Swing trading these markets is not for the faint of heart. First, they move very quickly, often overnight, which means your protective stops may get run over and you're out a lot more money then you had planned on losing. Second, they're very expensive. Margin on one crude oil contract is $4,000. RBOB gas is $6,075 and natural gas is a jaw-dropping $10,125!

You can, however, get into the energy markets with mini contracts: oil is $2,025; RBOB is $3,375 and natural gas is $2,531.

We also like to use out-of-the-money options with strikes at areas we are looking for the market to turn. Yes, in volatile markets options tend to be expensive, but we also prefer them for money-management as our maximum loss will never exceed the price for the option.

As I write this, hurricane Felix is moving on a path just south of where Dean hit, and should cross the Yucatan and into the Gulf of Mexico on Thursday. Two weeks ago when Dean hit the Gulf, most of the Mexican oil pipelines shut down. As Mexico is one of the biggest exporters of oil to the U.S., we saw a drop in crude oil inventories with the Aug. 29 report. This caused oil futures to jump almost $2.00 per barrel that day, and prices are still hovering at their highest point since the second week of August. This map from the NOAA (http://www.nhc.noaa.gov/refresh/graphics_at1+shtml/205025.shtml?5day#contents ) show that the eye of Felix may not cross back into the Gulf, and it may weaken substantially. Our strategy here would be to short crude and RBOB futures or buy put options on oil and RBOB.

For crude oil, I like the Dec. 69 puts. $69.00 seems to be a good support level for Dec. crude, and prices quickly fell to that level two weeks ago when Dean proved to be not as devastating to the oil infrastructure as first thought. Remember, though, that the supply from Mexico will still be slowed, and the next week (after the API/EIA energy stocks reports come out on Wednesday) oil could see another big up-move. Protective stops are an absolute, and if you get a profit at your goal make sure you cash it in quickly.

We could also do the same trade with the same plan with RBOB gas. Using the Dec. contract we would short with a goal at 1.82, or buy put options with a 1.82 strike.

With natural gas, we're staying on the sidelines for now unless a hurricane moves deeper into the Gulf and threatens the Texas and Louisiana coasts. Also, reports show that we're sitting on record inventories of natural gas, and that's keeping prices at extreme lows, in the $5.34 area. Here's a link to Platt's, a company that publishes some great analysis on the energy markets: http://www.platts.com/Oil/Resources/Futures/index.xml .

We will keep an eye on natural gas, and look at the Dec. '07 or Jan. '08 for a possible call option trade. We'd be looking mostly at Jan. in the $9.00 to $9.60 strike range as many articles hint that natural gas could run back to the $10 area if a big storm hits the Gulf coast states.

OJ Update:

We still think buying some OJ calls will be a money-maker if Florida gets threatened by a big enough storm. Soon after our last post, a new report came out saying the OJ crop will be much larger than forecasted back in the spring. That sent futures prices back to their lows of the year. We'll keep watching this trade for the rest of the month. Nov. 160 calls are now at .50, or about $75 each before commissions. The Nov. 140 calls at now 1.55, or about $230 each, and that may be a more realistic goal as the contract is trading at 118.

As we write this, there is a possibility that a tropical depression is forming off the north east coast of Florida (refer back to the map above). We will keep a close eye on this.

Bill's Soymeal Recommendation:

I apologize that I haven't done more in talking about Bill's soymeal call option trade from the last post as my vacation got in the way. It has been a very fruitful trade for those who got in: the Jan. 250 soymeal call options have better than doubled in price to $12.85 as of this writing.

Wheat Poised for a Tumble?

I'm getting real excited that the wheat market is getting ready for a huge drop. It's sitting on record highs ($8.00 per bushel for Dec. '07). The last time wheat hit nosebleed altitude (back in mid 1996) it quickly dropped like a rock, making thousands of dollars for those who were short. I started to pick up some Dec. 6.40 put options late last week. Why the options? Because there is still a chance I'm jumping in front of a fast-moving train. There is still a lot of fundamental supply issues that could keep wheat at high levels, and the market has a habit of gapping up and moving over 20 points a day (each point is worth $50 - so that's a $1,000 this contract can move without batting an eye).

As I write this Monday evening, wheat has gapped up over 20 points and will likely continue to test its highs on Tuesday. Keep a close eye on this market: there are a lot of hedge funds who are long wheat, and another drop in prices could see them dumping their contracts and pushing prices back to the $6.00 level, which on the charts look to be a reasonable support area.

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.