Future And Commodities Options:
An Insider’s Look At One Of The Most Explosive Markets
Smart Profits Report Issue #499
February 21, 2008
By Lee Lowell
Futures Options & Commodities Specialist, Smart Profits Report
Editor’s Note: “If you’re not taking a serious look at commodities as a viable addition to your overall investment portfolio, then you’re missing out on some potentially very lucrative profits.” So says our resident commodities expert, Lee Lowell. And Lee should know. He’s a 17-year veteran of the commodities world, spending six of them as a real insider - a market maker on the trading floor of the NYMEX, where he was one of just a few guys who actually set the price of oil and natural gas. That’s why we’re introducing an added benefit to your Smart Profits Report - a bi-weekly commentary of what’s happening in the critical commodities sector. We’ll analyze the major commodities, give you the latest news, trends and charts, and show you what to expect in terms of price movement, so you know how to profit. Over to Lee…
Stocks Dominate… But Commodities Drive The World’s Everyday Living
We live in a stock-dominated financial world.
Apart from perhaps the oil and gold markets, the commodities sector doesn’t get much attention, compared to the stock market. Most media outlets prefer to focus their attention on stocks.
But let me tell you something: For all the talk about how fortunes are made and lost in the stock market, that happens just as much in the commodities market. Having covered commodities pretty much exclusively over my 17 years in the business, I’ve seen this at first-hand.
If you’re unfamiliar with the commodities markets, don’t worry. This segment is a great chance to get up to speed. You see, investing in commodities isn’t really all that different to investing in stocks. Just as you invest in stocks and stock option contracts, in the commodities world, you do it through futures and futures options contracts.
So what exactly are commodities?
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The Twin Combo Driving The Commodities Wagon
Simply put, commodities are everyday consumption items such as oil, natural gas, wheat, corn, soybeans, coffee, sugar, cocoa, cotton, orange juice, etc. Gold is also a member of the commodities market. There is a large and thriving market for all these products and we want to show what’s happening in the current environment.
Unlike stocks, which have a variety of external influences, the main factors that drive commodities prices are very simple:
- Supply and demand
- Growing cycles
- Weather conditions
Obviously commodities can be volatile, just like stocks. But because there are real-life, unbiased factors like this involved, it makes the commodities market a little easier to predict. That gives investors a great advantage.
As I mentioned, two commodities are dominating the headlines at the moment: Oil and gold. It’s not hard to see why.
Both are hitting all-time highs and don’t look like they’re going to stop rising any time soon. Oil recently eclipsed the $100 per barrel mark and gold has traded above $940 per ounce. Let’s see what’s in store next…
The “Mack Daddy” Of The Commodities World
You want excitement? With intraday moves of $3 to $4 per barrel, crude oil is rocking and rolling its way higher. That’s a dollar value move of $3,000 to $4,000 per single contract alone! And there are people who are trading 100 contracts at a time.
While such moves whip the media and investors into a frenzy, there are many others who are loving the volatility and are using it to rake in a fortune from the market. Take a look at the chart to see what I mean…
As recently as early September, crude oil traded around $70 a barrel. But just look at the spike we’ve seen since then. Just a few hours into 2008, oil finally hit the long-awaited $100 level.
What many casual observers don’t realize, however, is that this $30 span is representative of a dollar value of $30,000 when trading futures or futures options contracts.
Even with expected pullbacks along the way, it doesn’t seem like the psychologically significant level of $100 is going to hold this market back. There’s enough turmoil overseas and huge speculative hedge fund money to keep this market humming for a while.
Gold Following In Crude’s Oily Footsteps On The Way To A Watershed Level
When oil prices rise, gold prices also tend to rise, as investors look for a traditional safe haven hedge against high oil. This is what we’re seeing today, as gold prices have experienced a move almost as impressive as oil. Take a look at the chart…
With September again serving as our starting point here, you can see that gold has jumped $240 per ounce. That’s a dollar-value move of $24,000 per contract.
While $100 is the important mark for oil, it’s $1,000 for gold - and again, there is little standing in the market’s way right now.
Oil And Gold Grab The Headlines… But Wheat Wins The Price Spike War
The last commodity I want to discuss today is wheat. This market hasn’t received as much press as either crude oil or gold, but if you look at the sheer price movement in the chart below, it has eclipsed both of those markets.
That’s one heck of a run. From lows around $5 per bushel as recently as May last year, wheat has experienced a staggering run to its recent high of $11.50 per bushel. In dollar terms on an options contract, that equates to a huge move of $32,500.
So what’s the reason for this spike? As I mentioned at the top, weather conditions are a major influence on commodity prices - and wheat crops have endured a severe drought in overseas growing regions. Add this supply strain to growing demand and you’ve got the recipe for a major bull market - one that’s set to continue in the light of recent forecasts…
Government And Goldman Project Lofty Future For Wheat Prices
The U.S. is the world’s top wheat exporter… and the latest figures from the Department of Agriculture predict low supplies and high prices over the coming months, due to continuing strong demand.
In January, the USDA projected that U.S. wheat stocks would total 292 million bushels by the end of the 2007/08 marketing year on May 31. But recent shortages have resulted in a sharp downward revision to 272 bushels. This is the lowest level since 1947/48, according to Goldman Sachs’ weekly Commodities Watch report.
In light of this supply shrinkage, Goldman itself has raised its price forecast for wheat futures to $13.50.
These are three of the biggest commodity movers at the moment. I’ll be covering them - and other markets - in future editions. Meantime, if you’d like some free information about these products, check out the websites of the exchanges that these products trade on. Here are a few:
www.nymex.com
www.cbot.com
www.cme.com
www.theice.com
Talk to you again soon.
Lee Lowell
Today’s Smart Profits Notes:
- Oil prices dropped today following a report from the U.S. Energy Department that showed oil inventories rose by 4.2 million barrels last week - well above the projected forecast of a 2.9 million barrel increase. In addition, renowned commodities investor T. Boone Pickens popped up on CNBC and stated that he’s currently short on oil, as he believes the black goo is set for a short-term drop in price. In fact, he predicts a hefty fall of $10 to $15 per barrel during the second quarter… but not for long. He says oil will spike back to $100 a barrel again in the second half of 2008.
- In a volatile market like this, wouldn’t it be great to line up an investment and know that you have an 80% (or higher) chance of turning a profit before you even pull the trigger? That’s exactly what Lee Lowell does all the time in his Triple-Zone Profit Trader commodities investing service. He does so using the probability calculator - a tool that the pro traders know about, but most ordinary investors don’t. On Wednesday, Lee cashed out of a position in the cocoa market for a 44% gain in just one week. And just today, he closed out a cotton trade for 99% in 10 days. For more details on this explosive service, give our friendly VIP Trading Services team a call at: 888.570.9830 (within the U.S.) or 410.454.0498 (from overseas).
Related Articles:
Investing in Commodities: Four Reasons Why Commodity Investing Is Better Than Trading Stocks
Futures Commodities: How To Invest In The Volatile Commodities Market
Renewable Energy Resources: How To Profit From Rising Oil Prices & A New Boom In Renewable Fuels
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