Options Trader: Wednesday Outlook

Without a lot of data to lead us this week the crude inventory report looms large today.

We’ve noted that the Dow has been moving in perfect counter-step with the POO for quite some time, so we can expect a big move by the Dow today in whichever way oil doesn’t go.  If oil breaks $142.50, that is likely to send the markets down below those critical 20% levels and it will be time for us to cash and cover into the weekend.  Don’t forget the NYMEX criminals shorted the market 20M barrels of oil this month as they canceled 3,979,000,000 of the 4Bn barrels traded last month, leaving Cushing with less than 1/2 it’s usual supply of oil for July.

This artificial shortage may cause a serious "draw" in inventories all month in July or it may simply offset the massive demand destruction noted by Mastercard (MA) as gasoline demand fell 2.1% last week, the 10th consecutive weekly decline measured.  Along with this, we have a clear picture of go forward demand destruction as truck sales have now dropped as much as 50% over last year.  Replacing just 1M 15 mpg truck with 30 mpg cars saves 15M barrels of gasoline and there are typically 8M trucks, vans and SUVs sold in a year, so I’d guess we’ve knocked about 1M barrels a week off US consumption on that end already.

Additionally, the FHA reports march had "the biggest-ever year-to-year drop in vehicle miles traveled on U.S. roads in a month: an estimated 4.3 percent, or 11 billion miles, below the March 2007 total of 258.3 billion."   4.3% - that’s a pretty big drop!  Over half of the 20Mbd the US consumes is gasoline so we are talking about 500,000 barrels a day less oil just based on the miles driven - no wonder the NYMEX crooks are shorting us 5Mb a week, if they don’t stop buying crude it’s going to pile up in the warehouse like police cars in the Blues Brothers movie.

Those figures are from March, oil was "just" $110 a barrel in March and "only" $100 a barrel at the beginning of the month - I just can’t wait to see how those consumption figures look with oil up another 40%!  Of course CNBC and the energy bulls are hanging their hats on the IEA report, which somehow predicts demand will rise (get this!) 10% in the next 4 years, no matter what they charge for fuel AND they forecast that (no matter the price) spare capacity will fall from the current 4Mbd (that’s right, the report says there is NOW 4Mbd of spare production) to less than 2Mbd by 2012.

Oh well, what are you going to do?  Even OPEC’s Secretary General, Abdalla El-Badri is fed up as he snapped back at an interviewer this morning ""We do not prefer a high price. We’d like to see a comfortable price," El-Badri said. "If you need oil, we can sell it to you, but we don’t see any queue."

At the rate we are losing jobs according to the latest ADP report, we’ll have another 45M people on unemployment by then, so I’m really not sure who the IEA thinks is going to pay for all this $140 oil.  Of course 45M unemployed is a ridiculous extrapolation of a bad month but - that’s the way they forecast oil so why not everything else?

Asia continued to fall along the line of a worst-case extrapolation with the Hang Seng dropping another 400 points (1.8%) and the Nikkei falling 176 points (1.3%), stopped only by the closing bell.  Auto and banking shares led the way down as even TM took a hit in yesterday’s auto sales report.  There are also huge currency concerns over tomorrow’s ECB meeting that may send the dollar off to new lows.

Europe was doing very well this morning and is still (9am) up about a point but took a big turn down on the ADP numbers.  Big British retailer Marks & Spencer warned of a 5.3% drop in sales and homebuilder Taylor Wimpey said it was unable to raise capital and will be writing down $1.3Bn in properties, cutting jobs and suspending its dividend.  That bad new was negated by Deutsche Bank (DB)’s announcement that they DO NOT need any capital and will, in fact, make a profit this quarter.   UBS (UBS) made a similar announcement yesterday and won’t it be funny if we get that kind of upside surprise from the US banks as well?  Denmark fell into technical recession and other EU nations are teetering.

The US markets will do whatever they do until 10:30 and then we are off to the races so let’s be careful out there, it’s going to be a wild one!

Comments

[saifl]

So you short oil and you are right and everyone else who goes long is a criminal?
Hey moron you still have not answered my question. How come Natural gas is up more than 80% this year with the largest net speculator short position?

[David Lentz]

Gotta wonder where all this oil that is no longer being bought is going -- are the producers in the position of having to scale back production because nobody will buy cheap oil? THAT certainly doesn't sound right!

A clearer picture of how the futures markets operate, and the ability to "cancel" contracts impacts things (the oil represented by those contracts still exists, one presumes), is sorely needed.

Examples, please -- with pictures and arrows and words explaining it all, a la Alice's Restaurant!

[BlueDog]

Philip,

On May 28, you recommended buying BAC leaps at $4.70.

"This is good timing for Bank of America (BAC) [another one of our LTP holdings], who are exercising $1.9Bn worth of calls to up their stake in China Construction Bank (CICHF.PK) to 10.75% from 8.2% in China’s second largest bank. BAC’s original $3Bn investment in June 2005 is now worth about $30Bn. The 2010 $35 calls are just $4.70 and make a fantastic long-term investment."

Those same leaps are selling for $1.34 today. That's a 75% loss in 1 month. I don't think anyone could have predicted how bad June was going to be, but I'm curious how you would handle such value erosion in long term calls that you've bought, e.g. sell, hold, average down, if your reason for buying has not changed. Thanks. I enjoy reading your posts.

BD

[saifl]

I think anyone with common sense could have.
Here read this site,
americanenergycrisis.b...
You will see how easy it was for some people to say that the banks are freaking doomed.

[saifl]

americanenergycrisis.b...

[Ex15:26]

Tell our peace loving brothers in the middle east to tell their soverign wealth funds to stop going long oil (and our pension funds too)....
"We don't have a queue!".... No, you don't need one when you can bid up the px and drive it higher.