Options Trader: Wednesday Wrapup

by: Philip Davis

Wheee! What a day!

Thanks to our man Ben we got just what we needed to get this party started - now let’s see if we can follow through Thursday and Friday, another 100 points should do it.

We had pretty much a perfect day for my levels, first time in a long time:

• Dow made a new ATH at 12,741!
• Transports already broke 2,900 mark, finishing at 2,908!
• S&P needs to jumped to 1,455!
• NYSE proved it’s a leader by taking us to 9,427!
• Nasdaq took 2,488 but so what? Show us the money at 2,500 - then we’ll talk tech!
SOX 470 was one from my wish list! - As I said this morning: 470 is our magic number (but only because we’ve scaled back expectations following a sort of Moore’s law of diminishing SOX returns as they get 10x more pathetic each quarter).
• Russell is our co-leader and 810 held, even going so far as to tack on a few to 813!

US Markets

Oil did its thing today, giving up another dollar even though the actual dollar gave up half a point as soon as Ben said he wasn’t worried about inflation. A .61% drop in the dollar saved oil from the embarrassment of closing below $58 but not for long as only the front-month March contract fell $1.06. Other contract drops were worse and worse down the line: April $58.57 (down $1.28), May $59.25 (down $1.36), June $59.82 (down $1.40)….

More barrels were traded in our four closest months today (498M) than yesterday (487M) as traders continue to play hot potato with the remaining 140M barrels still on scheduled for March at $58 (down 32M). April shot up to 307M (up 25M), May jumped to 103M (up 11M) and June held firm at 102M. The only person making money in all this frenzied trading is NMX!

Earning Power

There are now 650M barrels of oil contracted for delivery between now and June 30th at less than $60. The entire U.S. imports 11M barrels a day so that’s 1/2 of our total import consumption already guaranteed below $60 through Memorial Day plus one month! That is just 50M barrels less than the entire Strategic Petroleum Reserve!

• Add to that the 330M barrels we have in private storage;
• Add to that the 230M barrels of gasoline in storage (not counting gas stations);
• Add to that the 130M barrels of distillates in private storage;

That’s 690M (private storage) + 750M [SPR] + 941M contracts written for the remainder of ‘07 - a total of 2.38Bn barrels of crude that, in an emergency, we can be assured of getting. If ALL of our top suppliers (other than Canada and Mexico); Saudi Arabia (1.4Mbd), Venezuela (1Mbd), Nigeria (1Mbd), Iraq (500Kbd), Angola (500Kbd), Algeria (250Kbd), Kuwait (250Kbd) and Ecuador (250Kbd)… If they ALL cut us off without a drop (5.15Mbd), it would take us 462 days before were would be unable to fill up our tanks with oil that has already been purchased at $65 or less..

You are paying a $30 a barrel "Fear Premium" only because you believe the fairy tale that the NYMEX pump crew is telling you! There is PLENTY of oil. There is so much oil that OPEC,
Statoil ASA (NYSE:STO), TOTAL S.A. (NYSE:TOT), Chesapeake Energy Corporation (NYSE:CHK), Chevron Corporation (NYSE:CVX),
Murphy Oil Corporation (NYSE:MUR), BP plc (NYSE:BP), Royal Dutch Shell plc (NYSE:RDS.A) all CUT production this year, and we still had inventories build to record levels…

Only when the American consumer stops consuming mass quantities of oil at any price will this equation change. Don’t think it can’t happen look at Ford Motor company’s $22Bn in profits in 1998 - I’ll bet they said that party was never going to stop either!

Gold held firm today at $672 but with North Korea off the table, it’s hard to hang your hat on Iran to destabilize the planet all by itself. There was a false reaction to some key wording changes in Bernanke’s prepared text: First, the Chairman described the Federal Open Market Committee’s predominant concern as "the risk that inflation will fail to ease as expected" instead of "some inflation risks remain." Second, the Fed is "prepared to take action to address inflation risks if developments warrant" instead of "the extent and timing of any additional firming that may be needed."

This is what tanked the dollar but here I will say that oil traders may be smarter than dollar traders as there is nothing really here to suggest that rate hikes are off the table.