Options Trader: Tuesday Outlook

Now it starts to get serious!

We have the oil crooks attempting a run over $113 (now Mexico has now shut 3 ports to cut off supply, an outage that replaces the pipelines that were down last week to constrict supply). We have finally exasperated Goldman Sachs Senior Energy Economist, Giovanni Serio, who said about oil prices at the World Oil Conference in Calgary yesterday:

"This really looks like the plot to one of those action movies, in which the protagonist, no matter what you throw at him, no matter how badly injured he is, defies all laws of physics and won’t die."

As he spoke, crude oil was rising 1.5 per cent to a record $111.76 US a barrel at the close of floor trading on the NYMEX. Prices are up 76 per cent from a year ago.

NYMEX trading for May delivery stops on the 22nd and, with just 6 sessions left, traders are feigning interest in 176M barrels of crude at $112 per barrel when, in fact, they don’t want any of them and will be relentlessly canceling the 176,000 delivery contracts and rolling them to the next, cheaper month.

This "open interest" on the NYMEX of roughly 600M barrels in the three front months is pushing credibility to the max, as the delivery facility at Cushing, Okla., can only handle 42M barrels a month even if the traders did actually want the crude they are "ordering." Should there be an actual crisis and delivery be demanded, a "force majeure" would be called, canceling all contracts, so there is no real profit to be made in speculating on oil delivery other than the $1Bn a day being paid by the American people who are overcharged for the oil they consume based on this shell game.

Speculators are speculating that oil will go higher, and you know they need a push when they recycle the old "peak oil" stories; this time it’s Russian production that is "slumping" on page one of the WSJ. Note the chart they use that shows a flatline at 10Mbd is now considered a peak, just like the flatline at 6Mbd was the case for peak oil back in the late '90s. Still, investors fall for this BS every time, even though Petroleo Brasileiro (PBR) just announced that they found a brand new 30Bn field yesterday (that would be another 2Mbd added to the world supply for 4 years).

The dollar can’t get off the mats, despite the urging of the G7, and you simply can’t have it all - you can’t have a dead dollar based on a slowing US economy along with record oil prices based on record global demand along with record food prices as billions of barrels of oil are being replaced by food. At some point in the chain, the investing premise breaks down, but when, I don’t know…

Of course the rising energy and food costs are sending the PPI soaring, with a 1.1% increase in March alone - that’s a 13.2% annual rate, folks! This is double the rate that economists expected, and was led by a 2.9% rise in energy prices as oil averaged $104 in March vs. $96 in February. So far, April is up in the $108 range, but maybe we can top 3% this month if we all go out and do a little extra driving!

Asian markets stopped dropping (other than the Shanghai, which put in a 52-week low) with the Hang Seng and Nikkie regaining about half a point. China’s ICBC said they will avoid buying US assets as OUR market looks scary to a bank whose market is off 40% for the year. Japan issued a statement also pledging support for G7 action to stabilize the markets.

Europe is up about a point ahead of our open, but it’s a commodity rally that I’m not thrilled with. British retailer Tesco (TSCDY.PK) had a 12% gain in income, which is a nice market booster over there but overall retail sales are still weak. The Euro continues to remain stubborn against the dollar as French inflation came in at 3.2%, which is too hot for the EU and will lead to more tightening.

Our futures are heading higher as Johnson & Johnson (JNJ) came in well and the NY Manufacturing Index is showing signs of improvement (low expectations). We have a merger of Delta (DAL) and Northwest (NWA) airlines, which should lead to a merger of Continental (CAL) and (UAUA). The new DAL/NWA would have $35Bn in revenue, 800 planes and 75,000 employees. Oops, make that 65,000. No? Maybe 60,000? 55,0000???

Not surprisingly, labor unions are opposed. Robert Roach of the IAM (12,500 machinists) says:

"The deal is not in the best interest of passengers, employees or the communities these airlines currently serve. We will do everything legally possible to oppose any merger that threatens our members’ jobs, labor contracts, pensions, seniority and their right to union representation."

We have Intel (INTC) tonight but things are looking pretty good this morning and we’ll just have to grin and bear it on the commodity rally until someone does something other than talk up the dollar this week. After Intel we hear from IBM (IBM), Coca Cola (KO), JP Morgan (JPM) and eBay (EBAY) tomorrow, with Merrill Lynch (MER), Pfizer (PFE) and Google (GOOG) keeping things interesting on Thursday, and Friday, along with Google’s conference call, we get earnings from Citigroup (C) AND it’s options expiration day!

I promised you an exciting week, looks like we’re going to get it…

Comments

[silverspring]

Please watch out how much more dollar is going to drop. 2% more? If this could give us the hint how far the overheated commodity could hike before taking a dive despite some temporary event (i.e. capline disrupted, Russia oil output reduced) , we at some of our best interest should start to long put now. Overall, its preferred to observe the trend, not the scattered, distorted events unless you want to play really short term market, but better not to do so since current volatile market could throw most smart guys out of their positions.

[poet1]

great article!

[sunrises]

Hi Philip:

Would the news of PBR oil find equate to a 10 pt rise in today's market? Thanks for the good review.

[sunrises]

Also, wouldn't PBR new oil find be available sooner than the oil sands in canada? Would this give a further boost to PBR?