May 21, 2008

Let's see, T. Boone is bidding $150.00? O.K. I'll bid $149.00, Bob...

Too bad the markets don't really work like "The Price Is Right", although, sometimes I imagine that government statisticians are actually playing "PLINKO" instead of reporting real numbers.

So, for those of you that missed the fun today, the EIA inventory numbers came out very bullish. Crude Oil is trading as high as $134/bbl as I write this. Normally I would ask in whom you trust more, Big Oil (the API number) or Big Government (the EIA number); but this time they both agree with each other. So with that said we had a draw of 5 million bbls of Crude Oil and prices shot up to $135.00.

No, I do not recommend buying at this level. However I do recommend buying a Bull Call spread in Crude, RBOB, or Heating Oil if and when we get a quick retracement. And by "Quick" I mean possibly once we see an "Inside Trading Day", like the last one we had on May 15, 2008. Be prepared to act fast.

Believe it or not there's a lot of other things going on in the markets. For example, I think the biggest non-story out there right now has got to be the earthquake in China. Yes, I know it is old news, but what has been glossed over is the shutdown of their domestic energy production.

China halted a large amount of production from Oil, Gas, and Coal mines after the earthquake. They need to determine the extent of damage done to their wells and mines in this region to determine when they are safe to operate again. This is troubling to me in two ways. First, China shutting down any domestic production from any energy source is bad news from a supply/demand perspective. Second, what kind of damage did their energy infrastructure suffer?

With China's energy demand being what it is, I think we all agree that any type of production shut down will require that deficiency to be made up by imports. And, if the world's supply and demand is as out of whack as I believe it to be, this could be very stressful to the world's already maxed-out production. One thing to keep in mind is this; you just can't shut down and then re-start an oil well.

In addition to the shut down, I fear that there may have been sustained damage to infrastructure serving the area. Damage to terminals, pipelines, or other refinery equipment could prolong this outage. My real fear is that the repairs can go on for months. Until I learn to read Mandarin, getting any reliable news on this should continue to be difficult.

Oil company executives made the "Perp Walk" to Capitol Hill today to have fingers pointed at them and to be bombarded with stupid questions from the very people that are smarter than you and me, Congressmen and women. [If Pro and Con are opposites, then is Congress the opposite of Progress?]

What I am wondering is if these little charades are all part of the buying and selling of our "Elected" officials. Kind of like: "I'll only accept this bribe if you agree to come to Washington and let me yell at you in front of the news cameras when you jack the prices up too high..."

The only thing more comical than the dumb questions is knowing that these clowns have no idea what is really going on, let alone are about to do anything about it.

EIA Inventories

To view the EIA's Weekly Petroleum Status report, click here: http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/txt/wpsr.txt.

$135+ was hit today. Wait for a pullback to enter long positions. The higher the price reaches, the more extreme the volatility will get. Let us play the volatility to our advantage. If we get a fairly good break from $134 down to any area below $130, then I will start looking to get long Bull Call spreads.

Notice that on May 15^th, the Crude Oil market began what looked like a retracement to the 18 Day Moving Average (in Red) only to turn around and then have the market move much higher from there. I will be looking for a similar type of pullback. We might not see it go all the way down to $123, but I think anything below $130 will be sufficient before it begins its next leg up.

July RBOB

Let's again note that the $3.20 level was the consolidation/congestion area in the market until late last week. Crude's latest surge has pushed RBOB up to the $3.40 price level. If we get a retracement in the Crude Oil market then I would look for RBOB to make its way back down to the $3.20 level for support. I would not wait for RBOB to get to the 18 Day Moving Average (in Red), which is currently at $3.14, to begin buying Bull Call Spreads. I will begin recommending them before that number is hit.

Please call me to discuss any questions you may have.

1-800-284-1065 or markp@iepstein.com.

Good Luck and Good Trading,

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The Bull Call Spread is the simultaneous purchase of a call option and sale of another call option with a higher strike price. This spread is used in anticipation of the market going up in price. In general, your risk of loss on a Bull Call Spread is limited to the price you pay for the spread.

If the spread is held through expiration with the price of the underlying futures at or above the top strike price of the spread at the time of expiration, then the theoretical market value of this spread will be realized. On the date of expiration the option contracts will convert to futures contracts with an additional round turn commission incurred as a result. This spread does not have to be held until its expiration. Profits can be pulled or losses can be cut at any time during the life of this spread.

If the spread is held through expiration with the price of the underlying futures contract settlement above the lower strike price but under the higher strike price, the option with the lower strike price will convert to a Long Futures Contract and the option with the higher strike price will expire worthless. Your broker should be ready to "Short" the market before the close of the day session to offset any Long positions that will be assigned. By not closing out any Long positions, you are assuming the risk of being Long a futures contract. For that reason, I highly recommend working with a Broker to manage any option spread trades.

If the spread is held through expiration with the price of the underlying futures contract settlement is below the lower strike price, the value of the option spread will be Zero ($0.00), the price you paid for the option spread and all associated fees will lost.

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