Dramatic Oil Shift

Supply Comes in Lower!?

Dear Bottarelli Research Member,

Shame on me for trusting anything that OPEC said. The cartel’s recent track record is noting but lies, and today’s report is just another example.

Case in point, the Department of Energy said that U.S. crude supplies fellby 3.3 million barrels, motor gasoline supplies fell by 2.8 million barrels, and distillate fuel supplies fell by 1.4 million barrels in the week ended October 20^th.

Prior to this report, the expectation was that crude and gasoline supplies would show a big gain, which would have pushed prices lower, leading to my thesis for playing OIH speculative puts earlier this week. As it turns out, these numbers were dead wrong, and the actual falling supplies have now sparked an up-tick in oil prices for December delivery, up $0.94 cents at $60.29 a barrel as I write. Not only that, but gasoline futures rose $0.39 to $1.5775 a gallon and heating oil added $0.358 to $1.73 a gallon.

The early indication is that these reduced supply figures will overshadow any sort of earnings “disappointment” coming out of Big Oil this week. As we all know, record oil prices in the third quarter won’t necessarily translate into record profits at the nation’s biggest oil companies — but that may not even matter anymore. Take, for example, the recent trading action in ConocoPhillips (COP – NYSE) which was the first Big Oil company to report lower earnings that missed analysts estimates.

COP earned $2.31 in the quarter, down from $2.68 a year ago, and missed the expectation $2.40 per share. In addition, COP posted lower revenue of $48.4 billion versus $48.7 billion last year. But if you look at COP’s chart, it’s clear these numbers are now taking second fiddle to the new oil supply date — check it out!

Tomorrow, ExxonMobil (XOM – NYSE) is set to report earnings, and the expectation is that Exxon will earn $9.7 billion in the third quarter (or $1.59 a share), which is up about 20% percent from a year earlier. Of course, this won’t set any quarterly revenue records, but maybe Wall Street is already resigned to this fact — and will actually reward a strong quarter nonetheless. Either way, I think today’s news sets up a great situation to play a drilling company like Diamond Offshore Drilling (DO – NYSE).

As you know, reduced oil prices have caused investor concern about the future operations of the major drillers. But now that oil is rising and supply is down, that concern should be alleviated — at least in the near term. This could mean that drilling activity picks back up — and DO rallies from current levels to at least the mid-point of their 50-day and 200-day moving average around $75 or $76 a share. As a result, let’s add some longer-dated DO calls to our ledger.

PLAY: Buy the DO December 75 Calls (DO LO) at or under $3.00, good for the day. Current bid/ask spread is $2.70 to $2.90. Place a protective stop loss at $1.40.

I’d also like to add to our hedge position in the DIA November 120 Puts (DIA WP). Although the Dow is down 33 points today, these puts have yet to increase in value, which tells me that the floor traders are not pricing in the down-turn simply because they expect it will get absorbed by the bulls — just like every other down-tick in recent weeks. This could present us with a prime opportunity to add more protection to our ledger on the cheap, so let’s add to the position and sock them away for any down-turn into late October or November.

PLAY: Add to your DIA November 120 Puts (DIA WP) at or under $0.85, good for the day.

Lock and load!

Sincerely,