gold - oil ratio
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Started by bear - April 15, 2020, 12:26 a.m.

currently with gold at 1723 , and oil at 21,  this ratio is now above 80 to one.  

the last time this ratio was this extreme was in the bottom of the depression.  

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By metmike - April 15, 2020, 12:59 a.m.
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Wow!

By cutworm - April 15, 2020, 6:57 a.m.
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By Richard - April 15, 2020, 9:07 a.m.
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 The ratio will revert to the norm soon enough.

By TimNew - April 15, 2020, 9:45 a.m.
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For once we agree.  This is a good time to be loading up on Long OOM  Calls.

By Richard - April 15, 2020, 10:34 a.m.
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The following transaction has been completed on 4/15/2020 9:44:38 AM (ET):

Account Number:
Order Number:285060432
Symbol:CLQ20100C
Description:Light Sweet Crude Oil August 2020 07/16/2020 100 C
Action:Bought
Quantity:10 contract(s)
Price:0.01
By patrick - April 15, 2020, 10:45 a.m.
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The EIA report is again beyond strange. Despite cutbacks, the US is producing 5 million barrels a day above consumption.
http://ir.eia.gov/wpsr/overview.pdf
and CLK20 is under $20

By metmike - April 15, 2020, 11:29 a.m.
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Thanks,

That was a huge build!

Oil Prices Sink On Record Breaking 19.2 Million Barrel Crude Build


https://oilprice.com/Energy/Crude-Oil/Oil-Prices-Sink-On-Record-Breaking-192-Million-Barrel-Crude-Build.html?utm_source=browser&utm_medium=push_notification&utm_campaign=vwo_notification_1586981723&_p_c=1


"Refiners in the United States—and elsewhere in the pandemic stricken world—are cutting run rates and some have begun shutting down facilities as the supply of fuels continues to exceed demand by a growing margin. The pandemic is destroying demand, and this could continue for months depending on how the infections curve develops.

Last week, refineries in the U.S. processed an average 12.7 million bpd of crude. This compares with 13.6 million bpd a week earlier and 14.9 million bpd three weeks ago.


Production is also falling as selling prices become prohibitively low for many oil producers. Media have reported oil companies have idled 260,000 bpd worth of production in North Dakota alone and Texas producers are discussing obligatory cuts with the state’s energy regulator. The size of the cuts would be 1 million bpd, if agreed.

By metmike - April 15, 2020, 11:43 a.m.
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Oil falls 4% towards $28 on oversupply concerns

https://www.oilandgas360.com/oil-falls-4-towards-28-on-oversupply-concerns/


metmike: What is interesting is that the front month, CLK traded to a new contract low just after 3am this morning, at 19.20, just barely less than the low of March 30 at 19.27 and that held............... but that was BEFORE the most bearish EIA report in history.

AFTER the EIA report, the low has been 19.37.


It's only been an hour since the release, so the market has time to make new lows but to me, this means that incredibly bearish news was unable to inspire additional selling(or there is significant buying in that area).

Could be too that the market expected this and its not like we are seeing any follow thru buying. 

If we can't close lower today on this news, then what will cause us to go lower?

I'm not saying we won't close lower, just observing the price reaction at the moment.



By metmike - April 15, 2020, 12:12 p.m.
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Richard,

Thanks for sharing!

I have no idea on what could cause crude to trade above $100 by July of this year, which is just 3 months from now........ok,  in the conceivable world.

What would cause this is that we have the needed and expected massive supply shut downs over the next couple of months to rebalance with the historic demand destruction THEN, the coronavirus suddenly and completely vanished, as in there were near 0 new cases but even if this far fetched scenario were to take place, it would take months for oil to somehow get above $100 after the coronavirus vanished.

The current world economy is in no state to be able to afford much higher oil/energy prices like it did in 2008, when it was revved up and caused crude to spike to $150 briefly. 

I like you alot and appreciate you sharing but this is how I view buying options.

The attraction to most is that they have limited risk, defined by how much you pay for them and "unlimited potential reward".

But the reality is that they have an extremely high risk............of them expiring worthless and you losing all the money that you paid for them.


By metmike - April 15, 2020, 12:35 p.m.
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By TimNew - April 15, 2020, 12:36 p.m.
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However, if Crude were to get to 40-50 in the next few months,  those options would be worth a lot more than 1 cent.


I probably would have gone with a lower strike.

By Richard - April 15, 2020, 12:44 p.m.
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Oil options are actually rather expensive as many players think the up side has more potential then the downside.

By metmike - April 15, 2020, 2:17 p.m.
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"However, if Crude were to get to 40-50 in the next few months,  those options would be worth a lot more than 1 cent."


Tim,

No they won't and that's the point. In a few months they will all expire worthless. They expire in July.

If oil, somehow got all the way back to $50 in June, less than 2 months from now, those selling $100 call options that expire a month from then will feel real comfortable selling them dirt cheap because the chances of oil going from $50 to $100 in  a month, will not be much greater than going from $20 to $100 today.

If, however you thought oil prices were going higher and you bought just 1 August Crude futures contract and oil went up $10/barrel from the current price...........very possible, you would make $10,000/contract.

By metmike - April 15, 2020, 2:21 p.m.
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Oil options are actually rather expensive as many players think the up side has more potential then the downside."


This is true at $20 oil. 

Better chance for oil to trade $30, then $10. Even better chance for it to trade $40 than 0$.

$100 in 3 months?  $5 is probably more likely. What are the $5 puts with the same expiration going for? I would guess more than the $100 calls. 

By metmike - April 15, 2020, 2:40 p.m.
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When options are expensive is usually a good time to be a seller.

Recent, extreme volatility and risk in the oil market has jacked up the price of options vs historical prices/value.......so they are likely OVER priced.

Sellers are demanding more premium because the volatility means more risk for positions with unlimited risks.

Here are some prices for the August calls/puts that expire on July 16th, like yours.

They don't go all the way up to $100 calls.

https://www.barchart.com/futures/quotes/CLQ20/options/aug-20?moneyness=allRows&futuresOptionsTime=daily


Maybe worth noting is that the $8.50 oil put was trading at .08, which is 8 times higher than your $100 calls.

That doesn't equate exactly to an 8 times higher chance of $8.50 oil than $100 oil but sellers are demanding an 8 times higher price to buy the $8.50 puts vs buying the $100 calls. Spending the same amount on calls, .08($80) would get you the $63 calls. 

The $11 puts are .14($140 each). Spending the same amount, .14 on a call would get you the $57 calls.

So yes, the market obviously is charging MUCH, MUCH more for an out of the money position for a price increase of X dollars vs a price decrease of the same X dollars. 

By metmike - April 15, 2020, 3:02 p.m.
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August crude is also trading at an amazing $11+ higher $31.56) than the front month May futures contract, which is around $20.

This must be close to a record for contango.


How can traders use contango to take advantage of the storage shortage for crude oil?


https://www.investopedia.com/ask/answers/041315/how-can-traders-use-contango-take-advantage-storage-shortage-crude-oil.asp


Traders with access to physical oil and storage can make substantial profits in a contango market. Other traders may seek to profit on a storage shortage by placing a spread trade betting on the contango structure of the market to increase.


Contango means that the spot price of oil is lower than future contracts for oil. A futures contract is a legal agreement to buy or sell a physical commodity at some point in the future. The spot market is the current cash trading price for that commodity. For example, assume that the spot price of oil is $60 a barrel. The future price of oil two months from now is trading around $65. This represents a contango futures term structure. At some point, the futures price will converge to the spot price, whether the futures price is above or below the spot price.


In this situation, a trader who controls physical barrels of oil and has access to storage can easily lock in a profit. Going back to the example, the trader will sell a futures contract for delivery two months out at $65. By locking in that profit at the higher price, and then sitting on the physical oil for a couple of months, a trader can realize substantial gains. One futures contract of oil represents 1,000 physical barrels. On a full-size oil futures contract, that would represent a profit of around $5,000 for merely storing the oil for a couple of months.

By metmike - April 15, 2020, 3:13 p.m.
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https://www.investopedia.com/terms/c/contango.asp


Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset price is expected to rise over time. This results in an upward sloping forward curve.


Contango
metmike:  Above graph. The more bearish the market is, the more likely for contango to be large. 

Poor fundamentals and lack near term demand/excessive supply will pressure near term prices vs prices at a later point in time that hold their value. Crude is currently in EXTREME Contango..........the August is priced more than $11 higher than the front month, May which is around $20/barrel.


Backwardation
Backwardation.


metmike: Bull markets are often driven by high, near term demand that can't wait and pushes current prices much higher.

By metmike - April 15, 2020, 3:36 p.m.
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An interesting element to the recent price move of the liquid energies is the gain of UNL over the HO.

HO right now is at life of contract lows. Previous low was April 1, at 93.03 for the May contract. Current price is 92.18.

However UNL made the unbelievable spike lower on March 23, of 46.05 for the May contract. April was the front month at that time and spiked to the really, really unbelievable price just below 38c, briefly on the low that day.

May is currently 72.21 and a bit higher for the day vs the heating oil over 2c lower and making new LOC lows. 


CLK is also a bit higher, 20.37 after getting a tad under the previous low very early this morning(hitting 19.20) and being hit with the most bearish EIA in history. 

By metmike - April 15, 2020, 6:53 p.m.
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By metmike - April 15, 2020, 7:31 p.m.
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Oil calls
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By Richard - April 16, 2020, 8:48 p.m.
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I bought the out of the money calls as a calculated risk/reward trade. The market place is not properly assessing middle east risk as compared to the price of the calls. I have been buying oil options on a regular basis since the risk increased (Again)and made this trade worth it, which was about August 2019. I did hit it with the strike on S.A. where oil opened $5 higher, and then went another $5 before collapsing. I had the sense to sell some options within the first 12 hours when pricing was absurd, and actually made a lot.  But other then that there have been many more losses, never the less, that was my reasoning.

Re: Oil calls
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By metmike - April 16, 2020, 11:26 p.m.
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