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The Oil Inflection Point

|Includes: Teucrium WTI Crude Oil ETF (CRUD)

 

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ENERGIES | METALS

By Kevin Davitt

To discuss this commentary in more detail, email me at kdavitt@rcmam.com or call 312.870.1520.

In my opinion, there is a point (visible only in hindsight) where the price of oil moving higher pivots from an indication of improving economic conditions to a drag on future growth. I believe we're very close to that point given the recent rip in Energy prices.

In the middle of April (3 months ago) August Crude (NYSE:WTI) was as low as $86.29. We're now trading just below $106 and touched $107 last week. $20 or 23% higher in 3 months is a big move.

On June 24th (3 weeks ago) August Crude was as low as $92.62, so the market has rallied 15% in very short order. Gasoline and other refined products have moved with a greater velocity.

From an options standpoint - we're seeing trade with the hallmarks of climax buying. In mid late June WTI vols (30 day options) were trading around 20% and the market had a distinct put skew. Last week, short term options vol was 28%-30% depending on strike with flat/call skewed structure.

Big picture, Crude had been coiling for a long time and clearly broke out of it's range.

Hot money ("evil speculators) have been pouring into Crude of late.

Last week JP Morgan cut US Q1 GDP estimates to 1%. ONE PERCENT. This is the 5th year of a "recovery". Housing activity, which tends to be a leader has been robust..... and we're looking at the prospect of a Q1 GDP of +1%.

Goldman lowered their GDP expectations this morning following an abysmal Retail Sales number. They "tapered" their expectations for "growth" from 1.3% to 1.0%.

Couple the pop in Energy with the PIIGS becoming a problem again in Europe, the prospect of a "hard landing" in China (for the record I doubt we see that in 2013), and the US 10 year yield moving from 1.6% to 2.6% since early May.....and you could see some capitulating in the weeks or months ahead.

The Cash VIX is back below 14%.

The RUT continues to make new highs.

The S&Ps are 7 points below the 5/22 (Bernanke day) reversal (all time highs).

Speaking of which, Bernanke will give his semi annual Humphrey Hawkins testimony starting on Weds and concluding Thursday.

Retail types have piled back into equities (out of bonds) in recent weeks. Here's an updated look at the AAII Bull Ratio.

From a speculative standpoint I would consider short delta plays in the Equities going into Bernanke. Vol is low enough where your risk reward is favorable.

We're looking at September put ratio spreads in Gasoline. Expecting a pullback to the 2.80 area with limited risk in the event RBOB continues higher.

Natural Gas has pulled back toward an area of recent support.

The Platinum v. Gold spread is making slightly higher highs, but very aggressive types could consider fading the move and looking for a pullback from $135 over to $80 - $90 over (particularly If Ben strikes a dovish tone on Weds).

Coffee options expired on Friday and the market is shaking off late week pressure - popping 3.5% today. Recent range = $1.17 - $1.25.

Risk Disclaimer: This information is not to be construed as an offer to sell or a solicitation or an offer to buy the commodities and/ or financial products herein named. The factual information of this report has been obtained from sources believed to be reliable, but is not necessarily all-inclusive and is not guaranteed to be accurate. You should fully understand the risks associated with trading futures, options and retail off-exchange foreign currency transactions ("Forex") before making any trades. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more than your initial investment. Opinions, market data, and recommendations are subject to change without notice. Past performance is not necessarily indicative of future results. This report contains research as defined in applicable CFTC regulations. Both RCM Asset Management and the research analyst may have positions in the financial products discussed.