Merry New Year: Cheaper Oil, Silver Options

By Brad Zigler

Real-time Inflation Indicator (per annum): 7.9%

A couple of quick items for your consideration today.

Merry New Year from the EIA

The U.S. Energy Information Administration (EIA) has issued its monthly short-term forecasts for oil prices. In the words of this little corner of sunshine in the Department of Energy:

The current global economic slowdown is now projected to be more severe and longer than in last month's Outlook, leading to further reductions of global energy demand and additional declines in crude oil and other energy prices.

The EIA has set an average price forecast for West Texas Intermediate (WTI) crude oil at $100 per barrel. That's the average for all of 2008. Keep in mind that, year-to-date, WTI has traded at an average barrel price of about $104. Now, we've only got 15 trading days left in 2008. To bring the current average price down $4 in that time, the sell-off pace has to quicken some.

In essence, the EIA - if you put any faith in its forecasts - is telling you to short oil. And this, while the quarterly NYMEX oil contango has ballooned to a record $7.21 a barrel (need background on contango? See "Oil Demand Perking Or Peaking?").

NYMEX Crude Oil Quarterly Contango

Back in November, the EIA eyed a $112 average price for 2008. Do I need to tell you that they missed the mark on that one?

Looking ahead, the EIA thinks WTI crude will average $51 a barrel in 2009.

Never let it be said that your stingy government didn't give you something for the holidays.

And now, ladies and gentlemen, SLV options

Frustrated that you haven't been able to play your favorite option trades in the silver market? Be vexed no longer. The Chicago Board Options Exchange (CBOE) has come to your rescue. Monday, the CBOE launched option trading on two metals grantor trusts, the iShares COMEX Gold Trust (NYSE Arca: IAU) and the iShares Silver Trust (NYSE Arca: SLV). Both trusts hold physical metals.

This is both a first and a "two-fer" for the options bourse. Back in June, CBOE inaugurated trading in the SPDR Gold Shares Trust (NYSE Arca: GLD); options on a silver grantor trust haven't been traded on an organized exchange before.

The American-style options will trade on the January expiration cycle, initially with contracts maturing in December, January, April and July.

Comments

[Greg Pinelli:]

If the EIA is shorting oil..I'll definitely move in the opposite direction. Just about the time they catch up to a move it's long over. Oil will be..contrary to their ossified views...be very much in demand in 2009. By June people will be fighting over it..Why you ask?
1. Projects which could have contributed to a positive oil supply outlook have been shelved....
2. Month to month trailer trash like Iran and Venezuela have little if anything they can develop and make money on..they squandered..AS IN TRASHED...their futures for a buck to buy off their people.
3. Liquidity...look at the latest Bill yield..NEGATIVE....ban... will lend because that's what they MUST do to buy Club memberships and trophy wives gifts for those who make the calls....

2008 Dec 09 08:44 PM

[NOWHEREMAN:]

Another inane rant:

The EIA is NOT shorting Oil. When it was forecasting higher Oil prices, you were quoting it to reinforce your opinions. Now that it is contrary to your opinions, They make "ossified" predictions. Duh?

1. Thank you for finally agreeing with my sentiments.

2. Take "Venezuela and Iran", substitute the USA, The Current Political Administration trashed our futures and is continuing the process in its final days. Instead of Buying off its people, it is using Fear to steer them. I would prefer to be bought off. IMHO

3. Have you lost both oars, or are you still using just one?
What Liquidity? What part of the word Negative escapes you?

2008 Dec 10 01:41 AM

[hoolio:]

Trailer trash? Two whole nations of people? Bigot. Anyway it's their oil and they're free to do with it as they like.


On Dec 09 08:44 PM Georealist wrote:

> If the EIA is shorting oil..I'll definitely move in the opposite
> direction. Just about the time they catch up to a move it's long
> over. Oil will be..contrary to their ossified views...be very much
> in demand in 2009. By June people will be fighting over it..Why you
> ask?
> 1. Projects which could have contributed to a positive oil supply
> outlook have been shelved....
> 2. Month to month trailer trash like Iran and Venezuela have little
> if anything they can develop and make money on..they squandered..AS
> IN TRASHED...their futures for a buck to buy off their people.<br/>3.
> Liquidity...look at the latest Bill yield..NEGATIVE....ban... will
> lend because that's what they MUST do to buy Club memberships and
> trophy wives gifts for those who make the calls....

2008 Dec 10 01:53 AM

[No Moss:]

Well, I like the article whose link I am providing ( by Daniel Dicker):

biz.yahoo.com/ts/08120...

Basically, Daniel mentions the huge contango that exists now (current price of $43 vs December 2009 futures of $57), plus credit issues that constrain the investment in futures and lead to deflation. The strong dollar is a major factor in keeping prices down. We've got winter fuel oil and cheap gas prices in the US to fuel demand.

What we haven't had is any geopolitical event of note recently.

Demand for oil will continue to drop until it doesn't, and then the turnaround could be very quick. China's demand for oil edged up in October, according to Reuters and this Seeking Alpha article:

seekingalpha.com/artic...

Short oil? Wow, that would be incredibly dumb at this point, given the low possibility of reward and the virtually unlimited possibility of punishment.

2008 Dec 10 05:47 AM

[NOWHEREMAN:]

Shorting oil at this point is shear idiocy but traders would do it in a wink if they could make enough to cover the costs.

For the longer term investor, buying rather than shorting would be the wiser decision. IMHO

2008 Dec 10 10:19 AM

[Socialism c...:]

That would be "Merry CHRISTmas". Anyone who wants to deny that this nation is founded on Judeo-Christian principles and belief in God is contributing to the problem, and our current economic morass is merely symptomatic of our loss of moral compass -- no moral people would wake up in the morning and perpetrate the types of financial fraud we see going on, nor permit abortion as a "choice", nor allow government to intrude to this degree in our lives!!

What is increasingly clear is that our current situation is the long-delayed chickens of moral decrepitude coming home to roost -- and none of your forecasts for "bottoming" or "bounces" will hold water until we decide to get back to the founding principles we started with!

2008 Dec 10 05:45 PM