Oil Prices Are Headed to $90… How to Profit From the Go

by Lee Lowell, Stock and Commodity Option Specialist
Monday, October 26, 2009: Issue #1123

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.

I’m talking about the oil market, of course.

Back in my August 25 column, I forecast that speculators would drive oil to $80 in the near-term, with $90 probably right behind.

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 go.

To see the original, click here.

So what’s coming next for this highly influential commodity?

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 go higher. Oil is trading above all three well loved moving average levels, which just adds to the bullish momentum.

Once oil went 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 go.

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 go, 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 place, 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 fantastic strategy for a year, but it’s finally reached an end.
2. No matter how terrible 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 small to the market are being forced to buy back their positions.

At this point, I believe this market has finally place 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 go upward.

To see the original chart, click here.

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 buys 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 buys or option spread buys.

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.

But, 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 go 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 started.

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.

To see the original chart, click here.

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 go in the wheat market. It has tacked on a solid $1.10 per bushel go ($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 go up to $5.70 before it tackles the next psychologically vital level of $6.00. We could easily see this occur, especially if the weather continues to hamper the harvest.

To see the original chart, click here.

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.

Excellent trading,

Lee Lowell

Editor’s Note: Commodities expert and former NYMEX pit trader Lee Lowell is on a roll this year. With two months of 2009 still to go, he’s notched up a 93% win rate from his recommendations in the Instant Money Trader advisory (15 out of 16 winners). The strategy behind this extraordinary success is a uniquely powerful one that allows you to buy the stocks at the price you want – and receive “instant money” in your account, just for doing so. For more information, check out his full report here.