Oil Prices

[dan_s]

Like most of you, I'm heavily invested in companies that will benefit from higher oil prices. This may sound strange but, IMO it will be better for all of us if oil prices would level off, at least for awhile. Our economy and our investments will do better if oil prices drift higher slowly instead of large price spikes. You may even have noticed that the share prices are often down on days oil spikes higher.

If oil prices hold in the $100 to $110 per bbl range the Sweet 16 will do very well this year. It is more important that investors and fund managers gain confidence in the oil price. Spikes cause FEAR that the fragile economy will collapse under the pressure of high fuel prices.

I do feel we will see $150/bbl by year-end and $200/bbl is like by the end of 2012. Take the time to listen to Joe Dancy's presentation at our March 31 luncheon and you will understand why. It is available on the website.

Dan

NEW YORK, April 1 (Reuters) - As the outright crude oil market on the New York Mercantile Exchange soared Friday afternoon to near life of contract highs, the crude oil options market took a more bearish view of the market, liquidating long positions along the forward curve and concentrating efforts on in-the-money puts.
"This has been an exhausting week, yet no one really wants to go home short over the weekend with all the Middle East news out there," said Anthony Rosado, options broker at GA Global Markets in New York.
Rosado said that futures traders were taking aim at significant resistance at $108.25 per barrel for the May crude oil contract and possibly at the recent Bollinger Band high of $108.70 per barrel. He said that the market would struggle to top $110 per barrel on NYMEX and $120 per barrel on the Intercontinental Exchange (ICE) for Brent.
As a result, volumes jumped on options for October and September $120, $125, and $130 calls, as traders decided to liquidate as the market's upward trajectory lost steam.
December $150 and $140 calls were sold off Friday as well. The December $150 call was pegged at $1.80/1.90 per contract Friday after trading to a 2011 high of $3.21 per contract on Mar. 7.
Still, even with that selling, open interest on that contract was 32,247 by the close of business Friday.
The December 2011 $140 call ended the day at $2.65 per contract, down from the March 7 high of $4.14 per contract. Open interest was at 26,505 by the close.
"People are taking profits while they still can. They are basically cashing in their lottery tickets, since this rally could end soon," said Rosado.
Traders pointed to the relatively low price of May $120 calls, at 24 cents, as another reason why the trade may be thinking that the current crude rally is running out of steam, since those calls should be much more expensive with the underlying market so close to that level. The May $120 call peaked at $2.35 on Mar. 7, 2011, but has been in a steady decline since then.
Open interest for the May $120 call closed out Friday at 30,211.
Oil producers were seen in the market earlier in the week, seeking to lock in crude oil prices above $100 a barrel.
"We've seen a large amount of producer hedging when prices were around $105-106, as they were worried prices could go lower, even if that hasn't played out for now," options broker Michael Korn of Skokie Energy said.
"While volatility has come down, making out of the money calls more attractive for those who are long-term bullish, one thing I'm sure of is volatility could easily increase. You don't want to be short volatility right now."
Korn added some of the producer hedging was for the end of Q2 2011, but the majority was for next year.
Beside the forward liquidations, traders said that May $65 puts were popular as the market braced for the potential decline. This trade was especially popular with the banks, which were writing the puts and pocketing fees. Open interest was at 3,182 with no volume traded and the price was 1.00 cent.
Puts in general have been gaining popularity among some traders on expectations that the market will likely turn lower at some point in the near future, traders noted, although the exact timing is up in the air, said brokers.