Looking To Score With Our Favorite Oil Service Company

We enter September with our indicators more or less on the same track as over the past month or so. The three areas giving definite signals are stocks, commodities (including oil), and gold, which I regard as a currency. More specifically, during the past week the indicators for both oil and oil stocks have improved from already bullish levels. The same goes for our S&P indicator, which gained a touch largely because of the increase, albeit a marginal one, in market volatility.

The indicators continue to be largely unaffected by both political and natural storms, responding instead to underlying economic and financial conditions. As I’ve noted before, that is symptomatic of the market’s inherently cold-blooded nature. Unless the markets believe a political or natural event will have a direct economic impact, they will shrug it off.

That said, I am not bold enough to forecast how the Korean situation will end. This means that while our gold indicators, both for gold stocks and for the metal itself, remain in negative territory (although improving), we are not going with a trade. Among other considerations, recent reports that China plans to launch an oil benchmark, one that will be partly backed by gold, is a major long-term positive for the precious metal. So while the near-term risk/reward balance for gold is tilted toward the downside, there are too many unknowns – potential events that the indicators can’t readily assess – that could change the outlook in a hurry.

Oil is a different story. An Eastern benchmark in oil backed by gold would be a positive for oil as it would suggest oil prices have become more aligned with underlying fundamentals. Today, “paper” oil prices too often overwhelm physical supply and demand dynamics. An Eastern benchmark and trading would tilt much more toward those more meaningful dynamics than to speculative futures trading.

The bottom line is that not only are we comfortable holding our position in the Suncor (NYSE: SU) January 19, 2018 $32 call option, we added a position today in Schlumberger (NYSE: SLB), the world’s leading oil service company, via the January 19, 2018 $67.50 call. While we could have opted for a more aggressive trade, both in terms of the underlying stock and the type of option (for example, an option that is more out of the money), Schlumberger is the Rolls Royce of oil service companies, and oil service companies are among the most leveraged beneficiaries of gains in oil’s price.

Looking ahead, one project on our front burner is developing an indicator for food commodities. It will be based on the CRB Index for food prices and will inform future trades in this currently very depressed sector, which includes stocks ranging from Deere (NYSE: DE) to Mosaic (NYSE: MOS). We will keep you posted on our progress.



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