The big news to hit the markets on Wednesday was the story that OPEC has agreed to production cut for the first time in eight years. After the news hit the wires, crude futures jumped up over 200 points on the day, nearly 6% higher, with the November contract putting in a high at 47.45. It was the biggest upward move in the futures markets since April.
As of this writing, the story coming from a meeting in Algiers is that OPEC has agreed to drop production to 32.5 to 33 million barrels a day. Some OPEC members will have to cut production, while Iran is given an exemption. Details on how much each member will be allowed to produce will not be decided until November. The production level translates to nearly a 750,000 barrel a day drop from August.
There may be a production cap coming, but there is not a supply issue. Early estimates have Russia pumping 11.1 million barrels a day in September. That is up nearly 400,000 barrels a day from August. It should also be noted that Russia will not be taking part in the latest OPEC agreement. Domestically, we continue to produce at near record levels as well.
I’m not saying crude is not going to go higher, but I think the run up will be short lived. I expect the futures to remain volatile in the near term. The opportunity to collect premium on the call side is there, but may be too much risk for some. I’m looking for an opportunity to play a retracement, and define risk.
I like buying the November crude 4100 put at 20 points ($200.00) or better. We are long premium, so risk is defined to the cost of entry plus fees and commissions. If I get filled at 20 or better, I am placing an exit target at 50 points. The November options expire on October 17th, so we have just over three weeks to be in the trade. If we don’t get a strong retracement, I would look to get out and limit a loss to 10 points.
For those interested Walsh Trading is holding our weekly grain webinar Thursday September 29th at 3:00 PM Central time hosted by our Senior Grain analyst Tim Hannagan. Tim has been ranked #1 by Reuters and Bloomberg in 2011 and 2012 for his most accurate end of year price predictions for soybeans and corn. Registration is free and if you cannot attend live, a recording will be sent to your email upon signup.
John Weyer
Director of Commercial Hedging
Walsh Trading Inc.,
jweyer@walshtrading.com
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.
