Tuesday, October 27, 2009

Oil Prices Are Headed to $90...

When it comes to the energy sector, this market is the undoubted leader of the pack in terms of making large intraday moves and the effect it has on the broader economy and other markets.

And right now, it's moving like a wildfire.


Sure enough, December 2009 crude oil futures (the front-month contract right now) has just tagged the $82 per barrel level. What's more, it came after hitting a recent low of $65.55. Even for the oil market, a two-week, $16.50 non-stop run is an impressive move.

Two Ways to Take Advantage of Oil's Continued Rise

With the perception that the U.S. economy is finally moving out of the doldrums, all the hedge fund and speculative money that has sat on the sidelines for months is finding a home in the oil market. Depending on which report you read, world demand for oil is expected to pick back up, and this is adding fuel to the fire.

Since hitting its lows in March, you can see the unabated move higher. Oil is trading above all three popular moving average levels, which just adds to the bullish momentum.

Once oil moved above $76 per barrel, it was off to the races. But we should see a touch of consolidation here, as all markets need to take a breather after such a strong move.

After that, we don't see any reason why oil shouldn't continue to keep moving higher. The $90 level is next in line and we could even see $100 again by the end of the year.

To play the move, you could do the following...

  • Buy shares or options of exchange-traded fund (ETF) like United States Oil(NYSE: USO). It tracks the movements of the crude oil market, but allows you to trade it directly from your stock brokerage account.
  • Go directly to the source - the trading pits of the New York Mercantile Exchange (NYMEX). This is where a majority of the trading volume still takes place and it offers a safe forum for buying and selling futures and futures options contracts. Although you'd need to conduct a trade through a commodity broker, you can access these markets electronically. Stick with limited-risk option strategies.

Four Reasons Why Natural Gas Has Set a Low... and is Ready to Rise

Having hit major new highs in the summer of 2008, it has been a long ride down for natural gas.

Simply put, that's because natural gas supplies are reaching maximum capacity. With the Energy Administration Information's announcement last week that supplies reached a record 3.734 trillion cubic feet, there's not much room left to hold all the supplies, which are reaching full U.S. storage capacity.

Naturally, traders have jumped on this huge supply as a "no-brainer" shorting opportunity. But as we've seen over the last few weeks, natural gas prices have only gone up. This leads to a few conclusions:

  1. Shorting the natural gas market was a great strategy for a year, but it's finally reached an end.
  2. No matter how bad the fundamentals may be, all the news finally gets factored into prices.
  3. Winter is approaching and colder weather could draw down supplies.
  4. Those who were too late to short to the market are being forced to buy back their positions.

At this point, I believe this market has finally put in a solid bottom and should see higher moves going forward. It looks like the technical side of the market is the driving force right now and with the price holding above key moving averages, we should continue to see it move upward.


There are two ways to play the natural gas market...

  • The United States Natural Gas (NYSE: UNG) ETF. Like USO, you can play UNG directly via regular shares, or options contracts through your stock brokerage account. Be warned though: UNG is undergoing potential changes to its holdings profile, as the Commodity Futures Trading Commission (CTFC) is discussing possible regulatory legislation that would curtail futures contracts purchases by large speculators and impose caps on the number of futures contracts they can hold.
  • Futures and futures options contracts in the commodity trading pits at the NYMEX. Once again, we recommend sticking with limited-risk option purchases or option spread purchases.


These Two Grains Are Making Gains

Like natural gas, corn and wheat have remained stuck in the doldrums since hitting highs in the summer of 2008.

However, over the past month, both have tacked on impressive gains. I profiled both markets on August 25 and October 13 and noted how higher prices could ensue, given that crop sizes could be lower this year.

In addition to the fact that it's tough for corn and wheat to move much lower, we've got cold, wet weather starting to hamper prime growing areas in the Midwest. This coaxed bullish speculators into the market and the upward moves began.

Corn: We pegged $3.90 per bushel for the December 2009 corn futures as a first upside resistance point, as that coincides with the 200-day moving average. Not only has corn hit that mark, it has powered through it, hitting $4.05 late last week.

Although there is no quality exchange-traded fund for the corn market, you can still participate through the use of futures options contracts that trade on the floor of the CBOT (Chicago Board of Trade). The March 2010 and May 2010 options contracts are the best choices.

Wheat: We've seen an equally impressive move in the wheat market. It has tacked on a solid $1.10 per bushel move ($5,500 per contract) and looks set to continue its trek higher.

Based on the December 2009 futures contract (the most active contract), we could see wheat move up to $5.70 before it tackles the next psychologically important level of $6.00. We could easily see this occur, especially if the weather continues to hamper the harvest.


Like corn, wheat futures and options trade on the CBOT. Again, focus on the March 2010 and May 2010 expiration periods. Grain options are worth $50 per cent, so if you bought an option for 10 cents, it would cost you $500 per option. That's a small investment for a potentially unlimited upside.

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