Crude oil has tumbled more than 70 percent off its record high above $147 a barrel in July, sliding below $40 in the final days of 2008. While this bearishness may persist in the short-term, I expect a rebound to $60 – $80 by the fourth-quarter of 2009 and recommend establishing a long-term bullish position now.
As we head into 2009, the credit markets should begin to stabilize, and growth in the U.S. economy should return by year-end. I see more optimism into 2010, and demand for commodities should return. I don’t see crude oil likely to head a whole lot lower from where it’s at currently, unless we have a viable and sustainable alternative fuel source.
I feel there has been a lack of interest in finding alternative energy on a widespread scale, as well as in building new rigs and refineries. The recession, and drop in crude oil, has taken the spotlight off alternative energy for now. It seems many alternative energy programs have been suspended. There has been talk of an ethanol bailout, but to me, it seems highly unlikely. The Renewable Fuels Association recently presented Capitol Hill staff and members of President-Elect Barack Obama’s team a variety of proposals to aid the ailing ethanol industry, including a $1 billion short-term credit facility and a $50 billion federal loan guarantee program.
Among the oil producers, Royal Dutch Shell has announced it is postponing an agreement to develop oil sands in Canada as well as a coal-to-liquids project in Australia. There seems to be a lack of expansion of energy worldwide.
If there is no notable growth in alternative energy, we will continue to rely on oil. Our economy will eventually recover, and demand will return. The Organization of Petroleum Exporting Counties (OPEC) has been continuously making production cuts and that should spill over into next summer’s driving season. In mid-December, OPEC pledged to reduce production by 4.2 million barrels a day from its September production level of 29.045 million barrels, effective January 1, 2009. Venezuelan Energy Minister Rafael Ramirez recently said the group may meet again before a scheduled March conference if prices keep falling.
Meanwhile, there are signs market participants may be gearing up for a rally. A recent survey of 33 analysts conducted by Bloomberg revealed that crude oil is seen averaging $60 a barrel in 2009, up from just under $40 currently. Prices averaged $100 in 2008.
The Commodity Futures Trading Commission’s latest Commitments of Traders report revealed non-reportables (mainly hedge funds and large speculators) have cut their net short positions in crude oil about in half. They are coming out of a net-short posture into a more neutral stance, and I see it likely that their next move will be to start establishing long positions.
For long-term bulls, I recommend a spread in the December 2009 crude oil options, which expire November 17, 2009. December 2009 crude oil is currently trading at about $52. Consider the $65/$75 call spread, which will cost about $2,150 plus your commission charges, and offers a maximum profit potential of $10,000 (less your costs) if crude oil rebounds.. I think this spread represents a decent risk-to-reward ratio. If the market stays where it’s at now in the first quarter, we can leg out of the $75 call by buying it back. But I think there is a good chance that by this time next year, we’ll see a better economic picture, and crude oil nearly double where it’s at today.
Feel free to call me for more specific strategies in this or other markets to suit your individual risk tolerance, and ask about a special half-off offer for new clients.
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