THE POLAR VORTEX HAS SPLIT! (UNG,USO,SPY)
OH. MY. GAWD!
In a development that’s caught nearly everyone off guard, a massive high pressure system recently sundered the normally quiescent Arctic ‘polar vortex’ in two!
It’s a little known, unique weather event that, according to meteorologists, could bring MUCH WARMER TEMPERATURES TO THE AMERICAN EAST COAST AND MUCH COLDER TEMPS TO THE WEST COAST AND CONTINENTAL EUROPE!
Did you get that?
In the coming weeks, the weather may change due to this disruption of the normally static low pressure cell that sits over the Arctic!
And whaddaya know, U.K. natural gas contracts have already spiked some 3.5% in anticipation of the cold blast, while the Russians, who supply a great segment of Europe with its natgas and heating oil, appear to be revelling in this ‘natural’, though odd, wintry phenomenon.
But was it all a Russian plot?!
It didn’t take long…
The inevitable conspiratorial plotlines have already begun spinning on the web and, to a lesser degree, from American and Western European officialdom. The theorists are all wondering whether Vlad the ‘Vortex Cleaver’ Putin had a hand in this latest weather oddity. And while we’ve little doubt that scientists of all nationalities have been pursuing every available means of controlling the weather, we’ve little faith that the Russians could have pulled off such a caper without everyone else becoming aware.
Besides, the Ruskies are too busy poking into our elections these days to meddle with something so banal as the weather.
But that doesn’t mean the Russian master spy hasn’t eyeballed such a plan…
But what’s it mean for markets…?
As mentioned above, Britons are now paying materially more for their natural gas supply, and it’s our feeling that they’ll shortly be paying more.
But more on that in a moment.
First, we turn to one open trade that requires your attention.
And it goes like this –
On January 23rd in a letter called Washington Redeemed, we recommended you consider buying the SPY July 20th 250 PUT for $2.91 and selling the SPY July 20th 240 PUT for $2.03. Total debit on the trade was $0.88.
The 250s go for $4.75 and the 240’s for $3.53. Sell the former and buy back the latter and you net $0.36 on $0.88 spent. That’s a profit of 41% in a month.
And that’s all-round good.
We’re going to take a closer look now at the natural gas market within the context of the larger energy spectrum. And we’ll start with a look at a rash of wildly bullish energy reports that have emerged recently from some of the biggest banker/brokerages in the land.
We start with Goldman Sachs, who had the following to offer on oil’s direction through 2018 –
…[W]e have raised our 6-month Brent crude oil target … to $82.50/bbl from $62/bbl previously, [and] front-loaded outperformance of the S&P GSCI, and now expect returns of +15% and +10% over the next 6 and 12 months, respectively. In addition, with low and declining inventories in key commodity markets, we expect commodity price volatility will rise from the current historically low levels.
A rise to $82 a barrel would constitute a jump of nearly 30% from today’s crude levels.
For their part, Citigroup is anticipating geopolitically related disruptions this year that could drive the price of crude toward $100 a barrel. They cite North Korea, Iran, Saudi Arabia and Israeli-Hezbollah tensions as possible drivers, while ongoing problems in Venezuela, Libya and Nigeria should keep a tight cap on supply.
And how’s it all playing out in the market?
Well, for starters, the accumulated net long spec position in oil futures is at an all-time high.
Have a look –
With the longs holding in excess of 650,000 contracts more than the shorts, we’re now in uncharted territory. Never before has there been such a high expectation of increased prices in crude.
And you could read that two ways. One, that the specs are about to get guillotined. And two, that the position is still in the process of growing, and will shortly top out in a blowout buying spree.
And the latter is our preferred read.
There’s simply too much fundamentally and speculatively driving energy prices higher.
And we’re playing it in a multidirectional manner.
A look at the chart below, matching the United States Oil Fund ETF (NYSE:USO), a proxy for NYMEX crude, and the United States Natural Gas Fund (NYSE:UNG), the NYMEX natural gas proxy, shows an interesting development over the last six months.
The chart goes back two full years, and reveals that for nearly the entire time, oil and gas have trended more or less in sync. Sometimes oil led, sometimes gas, but in the main, the two echoed one another’s moves.
Until roughly six months ago.
At that point, oil began to ascend with a tenacity that has been lacking in NYMEX gas. And it’s reached the point where the gap between the two is so exaggerated (in red), that we believe a snap-back trade has become too obvious to ignore.
The energy complex moves monolithically. All aspects rise and fall in tandem, mostly. We therefore believe the current divergence is unsustainable, and the gap will have to close.
Further to that, we would draw your attention to the most recent surge in volume on UNG (in black), a development consistent with an intermediate bottom. Shares have clearly moved from weaker hands to stronger.
Also, both RSI and MACD indicators for UNG are diverging higher from price (in green), a phenomenon that regularly presages a change in trend.
And with that in mind we offer you the following –- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
Wall Street Elite recommends you consider purchasing the USO January 18th 11 PUT for $0.81 and selling the UNG January 18th 19 PUT for $0.90. Total credit on the trade is $0.09.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
We profit on any outperformance of UNG over USO; whether it rises faster, or falls slower, we score a win.
With kind regards,
Hugh L. O’Haynew