September Crude Oil surged
this week to close almost $2.50 over last week's settlement at
29.33 per barrel. Persistent rumors of the US military
preparing for an attack have circulated through the energy
pits all week. Against this backdrop, the weekly API report
showed a dramatic decline in crude oil inventories last week.
The API pegged crude stocks at 295.648 million barrels, down
9.498 million barrels compared to last week and well below the
five-year average of 315 million barrels. Crude oil stocks
have declined for 6 straight weeks and have fallen more than
8% since a high of 322 million barrels was recorded in June.
The reason is not so much
blazing demand as it is tightness of supply. While demand has
only recently begun to show signs of life as the economy
slowly turns around, it is OPEC's production cuts earlier in
the year that have trimmed supply and created a bull market.
With prices at such lofty
levels, curtailing cheating on production quotas may become
more difficult. At the same time, don't expect to see a
significant production increase until at least the end of the
year. A relapse in the recovering economy, another wave of
panic selling in the stock market or a resolution of the Iraqi
situation could easily cause energy prices to correct sharply
and violently. However, as long as these factors remain on
their present course, expect prices to remain firm. An
invasion of Iraq in the face of the current supply tightness
could produce a price move eclipsing the 1990 highs.
The market seems to feel that
sugar is overvalued above 6 cents a pound as prices have
struggled to hold those levels for more than a few days at a
time. Fresh longs have seemed unwilling to enter the market at
those levels with heavy Brazilian exports expected to keep
pressure on sugar prices through year's end. While logistical
problems have hampered exports from the Center-South region as
of late, Brazil is expected to ship over 1 million tons of raw
sugar per month through November.
The market appears to be
settling into a trading range with the 6.40-6.50 range likely
overpriced while 5.00 sugar would seem too cheap. This can
often be a good situation for writing premium.
Monday's USDA crop production
report even surprised the bulls with the government pegging
ending stocks for 02/03 beans at 155 million bushels, while
lowering 01/02 carryout by 15 million bushels. A 155 million
bushel carryout for 02/03 would be the second lowest stocks
figure in a decade. While some argue that additional rains
this month could still produce significantly improved yields,
the widespread soaking rain that is needed has so far failed
As we head into the peak
demand 4th quarter, we can't help but be bullish. While
corrections are likely, we feel that soybeans may still be
underpriced and could have some upside before the recent
stocks figure is priced into the market.
Please feel free to call if
you would like more information on option writing or any of
the ideas mentioned above.
Liberty Trading Group
James Cordier is head trader
and president of Liberty Trading Group, a brokerage firm
specializing in option writing on commodities. James' market
comments are published by several national financial
publications and worldwide news services.
***The information in this
article has been carefully compiled from sources believed to
be reliable, but it's accuracy is not guaranteed. Use it at
your own risk. There is risk of loss in all trading. Past
performance is not necessarily indicative of future results.
Traders should read The Option Disclosure Statement before
trading options and should understand the risks in option
trading, including the fact that any time an option is sold,
there is an unlimited risk of loss, and when an option is
purchased, the entire premium is at risk. In addition, any
time an option is purchased or sold, transaction costs
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should be aware that with the potential for profits, there is
also potential for losses, which may be very large. All
opinions expressed are current opinions and are subject to
change without notice.