Lots of noise and rumors swirling in Washington D.C regarding Israel’s pending retaliatory attack against Iran that has investors and politicos on edge ahead of the Presidential election. Per the Washington Post, there have been multiple reports earlier this week that unnamed sources in the Biden administration have continued to leak information that Prime Minister Netanyahu has agreed to only attack Iran’s military infrastructure and weapons depot’s rather than their cash cow, the gas and oil industry and their possible Nuke Sites. Israel yesterday responded, stating while they will listen to US opinions on the matter, that they alone reserve the right to defend themselves by whatever means necessary. In other words, in my opinion, those sites are still on the potential strike list. The leaks have led to a pullback in Crude Oil by about $6.00 per barrel since last Fridays high, and to me presents an unbelievable opportunity in the crude and natural gas options deep into 2025. While the futures markets seem to reduce the odds dramatically of an open attack on Iranian oil infrastructure, the market now should explain that if demand is so bad why are supplies so tight? The IEA or International Energy Agency acknowledged that global oil supplies were falling and at a 7 year low even while they continue to predict a future oil glut. Hidden deep within the report as reported by Bloomberg is the acknowledgement that coal demand is at an all-time high. Electricity demand is rising faster than renewables output. Keep in mind the US also lost renewable output in Florida and other ares of the Southeast due to the hurricanes. Solar panels destroyed and the inherent inability of the windmills to handle heavy winds and their potential destruction due to these winds. In my view Natural Gas is poised for a near term bottom. Per Bloomberg, “despite all the Solar panels, windmills, the electric vehicles and all the government incentives to go green, the World has never used as much coal as it is burning this year.” Natural Gas is a clean burning fuel, its use is also expected to increase, especially as we enter winter.
Let’s though review some of the current administration’s stances and mistakes since last October 7th until present day that leave me convinced it’s just a matter of when and not if Israel deals with Iran.
Over many press conferences, Biden administration officials including the Secretary of State tells Israel don’t go into Rafah, that is a red line, but they were ignored with the result that the IDF wiped out the last fully organized fighting unit and killed 2000 terrorists and got control of the border with Egypt where the arms smuggling was coming from. That was when Biden administration denied Israel of 2000 pound bombs and then tried to claim there was no arms embargo of any type. Now after saying Iran can never be allowed to get the bomb, Biden says, don’t dare attack the bomb producing facilities or it will upset the Iranians too much. It is my belief that if Iran gets to a bomb, Israel’s existence is at stake, but we don’t want to get the Iranians angry. Then he says don’t attack the oil. Oil is what makes all the terrorists and weapons possible, but don’t take out their cashflows source. Then he says, and Kamala says, we need a cease fire and diplomatic solution now. So, stop destroying Hezbollah and finally wiping out the last vestiges of Hamas, and we need to sign another peace deal with terrorists who have ignored every prior cease fire and agreement so they can reconstitute and do it all over again.
The last thing the current administration wants in my opinion is for Crude Oil to rally significantly ahead of the election. Discretionary income for the middle class is dwindling and higher crude prices raise the value of everything especially groceries. The goal here it to sell risk premium in the front month Crude Oil options and Nat Gas options that expire in Mid to late November 2024 and use the credit collected to buy call spreads next Summer for zero cost to entry. Keep in mind previous moves into the mid 60’s per barrel in crude were met with the Department of Energy buying crude to refill the SPR. There may be at least for crude oil an underlying put in the market to buy physical in the mid 60’s per barrel range. Regardless of escalation or not in my opinion, should the underlying December futures trade above 62.00 per barrel by Mid-November, one has financed a long call spread deep into 2025 for just trade costs and fees. Trade idea below for specifics.
Trade Ideas
Crude Oil
Options – Sell the Dec 2024 crude 62.00/60.00 put spread. At the same time buy the June 2025 90 vs 100 call spread for even money, minus trade costs and fees. ECLZ24P6200:6000:M25C10000:9000[1-1+1-1]
Risk – The maximum risk per spread is 2K per spread if December Crude close below 60.00 per barrel before Nov 15th, 2024. However, should we stay above the 62.00-barrel threshold, our risk on the short put spread expires worthless in our favor, where one is left long a call spread that has been financed and doesn’t expire until Mid-May 2025.
Initial margin $554 per spread.
Natural Gas
Options – Sell the December 270/260 put spreads and at the same time buy the August 5.00/6.00 call spread for even money, minus trade costs and fees.
Risk – The maximum risk is 1K plus all trade costs and fees. Dec natural gas options which is the initial risk on the trade expires 11/25/24. Should the Dec Natural Gas futures be able to settle above 2.70 at expiration, one has fully financed a long call spread in August Natural Gas that doesn’t expire until late July 2025. Dec Natural Gas trading 285 as of this post.
Margin – 4-way Nat Gas, $325.00 per spread.
Sean Lusk
Vice President Commercial Hedging Division
Walsh Trading
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