Crude Oil has rallied two straight sessions off of their daily lows after a rebound in equities that were supported by comments from Fed officials namely Fed President Bullard. The commentary was seen as dovish by investors as to future Fed policy concerning short term rates. The rallies come in the face of a report from Dow Jones that said the Association of American Railroads, that crude-by-rail shipments dipped nearly 17% in 2015 and a whopping 35. 2% in the fourth quarter. U.S. refiners produced a record amount of gasoline according to the American Petroleum Institute but that may be coming to an end. Even as gas demand hits its highest level since 2007 in January according to API, refiners are saying enough is enough. The Wall Street Journal Reports “refineries in the U.S. Midwest are losing their thirst for oil, posing a new risk for the battered crude market. The Midwest accounts for nearly a quarter of the crude processed in the U.S. and is home to shale producers that have few other outlets for their oil. But refiners there are already swimming in gasoline and other fuel, forcing them to cut back production until the excess can be worked off.
The result has been more crude oil available in the market, worsening a glut that has been undermining oil prices for the past year and a half. With U.S. crude inventories at the highest level in more than 80 years, some storage hubs have little room left to store oil.” Yet in the past when refiners cut back the cost of products increased and seemed to drive oil higher. Maybe with a glut of oil this time will be different but it would be unusual especially as we start to have refiners switch to summer time blends of gasoline. The reason the refiners are cutting back is falling margins. The Wall Street Journal reports that “refiners profit on the difference between oil prices and fuel prices. Oil prices have dropped 70% since mid-2014 to around $32 a barrel currently, but robust demand for gasoline kept prices at the pump from falling as quickly last year, boosting refiner margins.” The EIA did report that gasoline stocks showed a surprise decline of 2.2 million barrels this week as gas production increased indicating stronger demand. In my view this was seen as supportive of RBOB futures as we move forward.
In my view March is going to be a very volatile month as many reports emerge, none more important than the FOMC meeting in the middle of March. Therefore I would remain agnostic here and be positioned on both sides of the market. I propose the following utilizing June RBOB options on futures contracts. For bullish exposure in the market consider buying the June RBOB 150 call and selling 2 June RBOB 164 calls. At the same time consider buying the June RBOB 120 puts and selling 2 of the June RBOB 110 puts. These ratio option spreads can be packaged for a purchase price of a negative half cent, which in cash value would be a collection of $240.00 for each options package. There are risks to this strategy with the first being all commissions and fees. The second is that you are short an extra put and call. If either gets exercised at option expirary, one would be either short a June futures contract at the 164.00 level or long a futures contract at 110.00. Please contact me if you have questions.
For those interested in grains, Walsh Trading’s Senior Grain analyst Tim Hannagan hosts a free grain webinar each Thursday at 3:00 pm central time. Tim has been ranked the #1 grain analyst in the United States per Reuters and Bloomberg for his most accurate price predictions for soybeans and corn in the years 2011 and 2012. Link for next week’s webinar is below. If you cannot attend live, a recording will be sent to your email upon signup. Or please contact me at anytime at firstname.lastname@example.org
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.