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October 26, 2006 Special Message From Our Author Get your Complimentary 6 Month Subscription! Today's Featured Article
Ask an Expert Questions and Answers Weisong from China asks: In answer to your question, OPEC can affect the price of oil only if our supplies are low like today. The DOE, Department of Energy, came in with lower stocks of 3.3 million and API, the American Petroleum Institute, came in with lower stocks of 3.6 million. The DOE Energy Information Administration said crude oil stockpiles fell to 332.3 million barrels in the week ended October 20th, proving the analysts' predictions of a 2.8 million a barrel build. Furthermore OPEC, the Organization of Petroleum Exporting Countries, saying that they would back production cuts pushed crude even higher today to settle at $61.38 a barrel for December delivery, that's up $2.03 a barrel. Before the release of data on our stockpiles shortage, crude oil remained under pressure Monday October 24th. The December crude contract that trades on the New York Mercantile Exchange was then trading at $58.93 a barrel, it was down 27 cents. Everyone thought that the market remained under pressure, and that at any moment it could break below this month's low of $57.70. The market was questioning whether OPEC would be able to institute its output cuts. Just last week OPEC had announced that it would cut output by 1.2 million barrels a day, that was more than the market had expected. The market still did not believe that OPEC would make the cut and just how much of a cut that it would make. Energy analysts had predicted that the poorer OPEC countries such as Indonesia, Venezuela and Nigeria would have a difficult time agreeing to a cut when they are producing below their quota levels. The energy market as a whole was doubtful if OPEC would follow through on its announcement. OPEC President Daukoru himself said that it was too soon for the cartel to make a decision on any future cuts to its members' crude production outputs. They are scheduled to meet on December 14th, 2006. Duakoru said at Monday's meeting in Calgary, Canada that he would not name the price level that OPEC was shooting for, he said that he deemed at necessary to keep the price of crude high enough so that the oil fields in Nigeria would flow at a premium and be economically feasible. He rejected a floor price of $40.00 a barrel, saying that the organization would need a little more but how much more he didn't say. We have seen crude oil go from a high of $78.40 a barrel in July of this year to below $58.00. The OPEC president said that the market was losing the fear premium that seemed to have been built into the prices. This fear premium was associated with supply concerns being cut off because of terrorism activity as well as the hurricane season in the Gulf of Mexico. It seems that the price of crude oil was now based more on supply and demand fundamentals. This was shown to be true when the price of crude oil futures surged to $61.40 a barrel today, that is the highest level so far this month after the government reported a surprising drop in inventories and a spike in demand for oil products such as heating oil and unleaded gasoline. The steep drop came as oil exports fell by more than 900,000 barrels a day in the key refining ports in Louisiana due to inclement weather. I believe now that OPEC may be taken more seriously now that our supplies are lower and demand is higher, also because now Saudi Arabia a member of the OPEC cartel is backing the cutbacks that should be a psychological boost to the oil cuts incentive. OPEC states that it will cut production on November 1 by 1.2 million barrels a day. This will certainly provide a floor under the market near these levels, because we have the winter season approaching and inventories are tightening.
Gary from Raleigh, North Carolina asks: Gary, there are many option trading strategies you can implement. There are the ratio spreads for example, we are using one now in the Orange juice option. We are buying slightly out of the money calls in say December and January options, and selling 2 out of the money calls in the Orange juice for a small premium. The one call in that spread will be naked and when Orange juice starts to rise in price approaching the strike price of the other option that is further out, we will then purchase an Orange juice futures position to stem the loss in that naked call. This works well with options that are close to expiration and markets that will move to be in the money so you could realize the profit between the strike prices. If for example you have a 10 cent or 20 cent difference between your strike prices you would then lock in a profit between your two strike prices if its 10 cents or 1000 points that would equal $1,500.00 in premium or profit and any losses that you would incur on the naked call would be more than offset by the locked profit. The unprotected call will become protected by placing a buy stop in the Orange juice market and when the market comes up and hits your stop you will be then be long the Orange juice futures. This will then stop further losses in that short call position even if the market continues in its movement upwards. The same strategy can work if you place the same option spread as a put spread when the market continues it downward momentum. You can place the same spread but now you are buying a put and selling 2 puts against the long put thereby covering one put and leaving the other put uncovered or naked. Only this time you would cover the naked put if the market starts moving into the money and when expiration arrives for your option you will be covered and still be able to take profits. These simple strategies can be used in any market. John from Scholten asks: Where do I think sugar will go from here right now? If you had asked me a week ago I probably would have said lower but based on the chart formations and the fundamentals in the market I would say higher. This morning the market opened higher based on what London sugar had done. The New York Board of Trade March Sugar ended the day higher 21 points at 11.90 cents a pound after reaching a high of 11.93 as buyers came into the market. Hopefully, the market found a bottom that low we had at 11.44 to 11.46 cents on Friday and Monday, October 20th and October 23rd respectively. But we need to get above the 12.05 cent mark to get to 12.65 cents and over. The sugar market was helped by the rise in the energies especially crude oil. We have mostly dry weather in Brazil so the cane sugar can be harvested there. The demand for the fuel, ethanol could more than double especially in Brazil. The sugar industry is also waiting to see if the Japanese adopt an ethanol blend in gasoline like the Chinese and the Indian markets are doing right now. Keep in mind because of the drought in Australia caused by El Nino that destroyed the Australian wheat crop, it has decimated their sugar cane fields. Asia is watching whether India will lift a partial ban it has white sugar exports. Weather is also playing a big role in our own backyard as well, Louisiana is looking for a good crop if the recent rains don't diminish the yields of the farmers' crops. They have suffered for the last 3 years with poor crops. If the weather permits them to harvest this huge crop, they should be all right. Many farmers in Louisiana have abandoned their fields steadily since 2002 when tropical storms and hurricanes stormed through the state destroying almost all their sugar cane. Many farmers are also leaving the business according to the American Sugar Cane League. About the Author Coming from a farming family history, Jovanka started out running in the grain pits with Saul Stone, and ever since then has been fascinated the way trading is conducted in the pits. Early on in her career, Jovanka would plot the movements of the corn and soybeans on a daily basis and watch the pattern develop over the week. This was the beginning of Jovanka learning her expertise in technical trading. Using that knowledge, Jovanka began trading a myriad of other markets, and saw that the same principles help up time and time again. Special Message From Our Author Get your Complimentary 6 Month Subscription! |
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Disclaimer: The Commodity Futures Trading Commission has asked us to also advise you that trading futures is not without risk. While there is opportunity for incredible wealth building, there is also the risk of losing even more than you invested. Of course, that's not unlike most other businesses. But informed traders are the best traders! Opinions expressed by Fast Break authors are not those of FutureSource. |