Pullbacks Offer Opportunities in Crude Oil, Corn and Sugar Options
Crude oil has had trouble extending its all-time high above $100 a barrel hit in early January, but I see the recent pullback on recession concerns as a buying opportunity, as well as pullbacks in corn and sugar.
The summer driving season is ahead, and economic conditions should start to improve in the second half of the year. I have been recommending the July $91.50/$94 crude oil call spread and the Dec $100/$110 call spread. In the past couple days, there has been news out of Nigeria that the Royal Dutch Shell refinery may shut down for as much as two months due to pipeline problems. It is said to halt about 130,000 barrels a day of production. In addition, the Organization of Petroleum Exporting Countries (OPEC) said it may cut crude oil production next month to keep its price above $80 a barrel. If that type of news came out last year, we would have likely seen oil shoot up dramatically. But this year, the fundamentals have changed and recession is on everyone's mind right now.
The market is wrestling with the prospect of sluggish demand given a sluggish economy. Thursday's release of weaker-than-expected January retail sales data showed consumers are backpeddling, as the monthly report posted its worst sales figures in five years. The National Association of Realtor's index of pending existing home sales also came out Thursday, and showed a 1.5 percent drop in December. March crude oil futures slid to $86.24 a barrel on Thursday, but rebounded to close up 97 cents at $88.11. Crude oil futures are slightly higher this morning, but still trading below $90 a barrel.
Another trade I'm recommending also related to the fuel trade is corn. There have been Federal mandates to drastically increase ethanol production this year, and that should benefit corn, which of course is also needed for food. Last year was a boom year for corn, and I see potential for more upside. March corn reached a record of $5.2875 a bushel on February 6, 2008, and I can see potential for new highs as there is growing concern inventories won't meet demand. The USDA's most recent forecast came out this morning, and 2007-2008 corn ending stocks were seen at 1.438 billion bushels, unchanged from the previous month. The USDA lowered its estimate of Argentina's corn production by one million metric tons to 21.5 million as extended dryness early in January reduced yield prospects. Corn is on the rise this morning, and I recommend buying December call spreads; consider 520/540/560/600 strikes.
Sugar has seen a recent decline, which I also feel presents an opportunity for longer-term bulls. This week we've seen a volume spike in the 16 cent October calls, and I'd recommend buying at 40 points or better, good until canceled (GTC). It's good exposure to a market has a long-term bullish trend still in place, and is rebounding this morning. There has been news of a sugar refinery explosion in Georgia that caused it's shutdown, and that is lending a boost.
Phillip Streible is a Senior Market Strategist with Lind Plus. He can be reached at 800-803-8037 or via email at pstreible@lind-waldock.com.
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