Oil Hits 17-Month Low

A Buying Opportunity, Perhaps?

Dear Bottarelli Research Member,

Just like that, crude oil hit its 2006 low.

In fact, today’s move under $57 a barrel represents the lowest level in 17 months, which was sparked by a 4% drop in natural-gas after reports of an inventory climb in U.S. But what really drove the volatility more than anything was the fact that this figure was released just upon expiration of the front-month contract. This promoted an unnecessarily high level of profit-taking, pushing the oil patch sector too much.

At the same time, gold futures erased early-morning gains and stretched their losing streak to five sessions, nearing a two-week low as well. In my opinion, each of these situations opens the door to buying opportunities not seem in over a year.

For example, rumors are swirling that the recent market & economic strength is making the Fed more hawkish on interest rates, which should prove to be a bullish catalyst for metal plays like Southern Copper (PCU – NYSE). In fact, PCU was up $1.73 this morning, which tempted me to take our profits, but the gains quickly retreated by mid-day. It just shows you how quickly prices can move, so let’s continue holding the PCU January 52.5 Calls (PCU AX) for more upside profit potential.

The same goes for our PVX March 10 Calls (PVX CB). Things were looking great until the natural gas numbers pushed the entire sector lower, but nevertheless PVX is still showing a slight gain on the day. This bodes well for our upside bias going into March, so maintain your PVX March 10 Calls (PVX CB) for more gains. If you were a “secondary” PVX trader and you took your gains off the table, congrats on a well-timed play.

Bearing the biggest downside pressure today are our SUN January 70 Calls (SUN AN) and our RIG December 75 Calls (RIG LO). Since RIG as a faster-moving trade, we hit our protective stop loss at $2.20. But since SUN has a longer-dated expiration date, we’re still maintaining the calls. After all, most of the major oil moves lately — whether up or down — are short-lived. The fact that oil is now touching its 2006 lows could spark renewed buying interest, as traders could now pick up oil names on the cheap leading into winter. This could be the bullish catalyst to push the sector higher as we lead into December and January, so let’s try to use our extended time frames to maintain our positions. Perhaps we can even use these low points as opportunities to add more longer-dated oil trades to our ledger. After all, I’m out about to bet against oil going into the winter.

We’ll use tomorrow’s action to see how the oil names react, and that should give us a good indication of how to proceed. Until then…

Lock and load!

Sincerely,