By James Cordier
News reports of outages and freeze talk are all fine and good. But at the end of the day, its hard for a market to sustain a rally with this big of a monkey on the market's back.
2. The demand cycle has now shifted toward the bears. September marks the beginning of "shoulder season" in the U.S. — a time of year typically characterized by weak demand.
As driving season has now ended but heating season has not yet begun, demand can find itself in a rut. This has historically often served as a weight on crude prices.
3. Freeze-schmeeze: The Saudis have started talking production freeze a week after they announced record production of 10.67 million barrels per day in July. So now they want to freeze production? At all-time record levels? It is our opinion that even if the Saudis do freeze production (a proposition that is questionable at best), "freezing" production at all-time highs won't have much impact on overall supply.
With record supplies and bearish seasonal tendencies, we feel any rallies in the crude oil market will be of limited nature — at least into late 2016.
We'll continue to position managed portfolios this month to take advantage of distant call premium in the crude market. Non-clients can consider selling the March crude oil 70.00 calls. At the time of this writing, these options are offering premiums near $600 each.
March 2017 Crude Oil
Selling the March 70.00 crude oil call leaves a wide cushion for the market to rally while still positioning for bearish fundamentals.
If crude prices do indeed see a seasonal decline into December, profits on these options could potentially be reaped by year’s end. Remember, one of the top lessons in option selling is this: for short calls to profit, the market doesn't necessarily have to decline. It only has to stay below your strike — in this case, $70 per barrel.
Despite the Saudi rumbling, we simply don't see that happening.
