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Squeeze Play!

Tue, Sep 23 2008, 14:39 GMT
by Phil Flynn

Alaron

A little squeeze if you please. October oil expiration got caught up in a classic squeeze play as the rest of the oil complex tried to assess the feds bailout plan on the value of the dollar. The happy feelings from last week’s rally were gone and the focus soon became what impact we might see on commodity price inflation.

But first there was an oil squeeze that had the market surging over 14% and that had someone scrambling to cover short positions into the last day of trading. Was it a hedge fund or someone trying to secure product in the aftermath of Hurricane Ike? I do not know. But what I do know is that even though this was the biggest one day up move for oil dollar wise, for squeeze plays percentage wise this was not one of the biggest I have seen. In 1996 the market on expiration day surged 32% on the last day surging from the five dollar handle up to a high of $750 more than twice the move percentage wise.

The back months in oil were up as well but the rally was not the enthusiastic hope for demand rally that we had late last week. This was a rally that had more to do with fear. If you remember last week the market rallied on hopes that the bailout would save the economy and thus save energy demand. Yesterday’s rally was all about the fears that no matter how much money the government prints it might not be enough to solve the crisis. The happy feelings were gone as the dollar plunged at the fastest rate since 2001. Oil was being bought against the falling dollar and against systemic risk.

That is not to say that demand worries are not playing some part. The market is worried about the tight supplies caused by hurricane Ike and Gustav and to add to those worries there is another tropical storm that could be a problem. The National Hurricane Center warns of a tropical cyclone or a broad area of low pressure centered over the Eastern Dominican Republic has the potential to perhaps become a tropical depression. If this storm gains strength and heads to the Gulf, the market will have a much harder time ignoring it. The third time would not be the charm for the US and world oil consumers.

Sell November crude at 11000 - stop 11200.

Buy November heating oil at 27000 - stop 26700.

We're short November RBOB from apprx 26500 - lower stop to 27300.

Buy November natural gas at 740 - stop 720.

Have a GREAT day!

Published on  Tue, Sep 23 2008, 14:41 GMT