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Crude Pain!!!


Albert Yang (Options guy)    12/08     5680    
2.5/2 

CRUDE PAIN!!!

Dec 06, 2015, crude price hit 7-year low of $37.65. Energy sector, with exception of refiners, sufferred another 5% haircut in market valuation. Doctor’s diagnose: oil market is oversupplied with a glut of oil having nowhere to go. Bearishness on the sector is approaching selling climax. However, the crude price is still heading lower according to oil futures term structure.

Term structure in commodity markets provides some of the best clues as to whether a market is in a deficit or a surplus. When it comes to term structure, backwardation is a market condition where deferred prices are lower than nearby prices, indicating a tightness or supply deficit.Contango, a market condition where deferred prices are higher than nearby prices, indicates that a market is either in equilibrium (supply and demand are balanced) or a glut or oversupply exists.

A huge contango persists in NYMEX crude oil as shown in the following table of Crude Oil Futures Quotes from CME group.

NYMEX

This is no sign that such contango is easing. that means crude oil price is still heading lower.  The 64 million dollar’s worth of question is by how much NYMEX correlated to energy stocks in general?

I am waiting for the day when crude drops 3 to 5 bucks a barrel with painic selling of energy stocks. A good buying opportunity then may present itself.



For very short term (1 month), i would put on a risk reversal strategy using energy sector contra/inverse ETFs, ie sell puts and use the proceeds to buy calls on selected contra/inverse ETFs. Prices of energy contra/inverse ETFs go higher when the energy sector is under selling pressure. For more market commentaries and trade ideas, please visit www.skyrockfund.com