OPEC Comes to the Rescue

It would appear this morning that OPEC has agreed to a cut in production, with the Saudis softening their position on Iranian production.

Formal details of the deal will come at a later time. However, the oil bulls got what they wanted.

We also saw a drawdown in crude inventories this morning, according to the Department of Energy. That drawdown is helping investor sentiment in oil, too. While crude draws have been historically typical for this time of year as the summer driving season comes to an end, we have not seen that trend over the last couple of years.

We believe this drawdown in crude inventories reflects a move back to the previous trend as supply and demand forces slowly work their way back into balance. This balance will take a lot more time, but it is good to see things going in the right direction.

As a result of the trends, we remain generally bullish on crude with the caveat that volatility is expected as well. With this in mind, when you receive this alert, sell the United States Oil ETF (USO) January spread trade by selling the USO January $11 calls and buying back the USO January $9.50 puts. If you recall, we bought this spread at 9 cents a couple of weeks ago and, upon closing out this trade, we should realize a gain of around 300%. As I mentioned earlier, we remain bullish on crude.

As a result, also buy ProShares Ultra Bloomberg Crude Oil (UCO) until we can reset and rebuy our options trade. So why sell the options if we are bullish? Because the event happened. Now, the options will probably decay as the volatility slowly bleeds out after the pop in oil prices today. We want to take advantage of the pop and sell into the rally as people are looking to buy. UCO will keep our energy exposure on without the decay as we look for a better spot to reestablish an options position. This trade may happen before the end of the week, so we encourage you to stay alert.