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How to Capitalize on Crude Oil’s Surprise Rally

How to Capitalize on Crude Oil’s Surprise Rally

As the bearish case for crude oil loses momentum, one overlooked catalyst will drive the price of crude oil and energy stocks higher before the year is over.

I’m looking for the price of crude oil to rally 18% to $70 per barrel by the end of October.

And that may be conservative.

Last time we saw the setup that’s in play right now, crude oil soared 30% in four months!

Either way, we have a chance to make a bunch of money.

And there’s a way you can do even better — a way you can earn triple-digit profits on a move like that.

The Reason Crude Oil Will “Surprise” Soon

The market hates oil and oil stocks today…

West Texas Intermediate, the benchmark grade used for U.S. crude oil prices, fell to $51. That’s a 23% drop from the high in April to the low in June.

Few analysts expect prices to rally.

But traders overreact to news and data … and they push prices too far.

When a trade gets pushed too far, I want to switch directions before everyone else does.

The U.S. Commodity Futures Trading Commission tracks commodity trading. They publish a Commitments of Traders report each week to shed light on trading done by four categories of traders:

  1. Producers and merchants.
  2. Swap dealers.
  3. Money managers.
  4. Others

I look at the money managers because their trading is speculative.

Their trading lets me gauge how they collectively feel about commodity prices.

I use it as a contrarian indicator.

Short-term price trends change direction when money managers feel too bullish or bearish.

In crude oil, money managers’ feelings move back and forth between too bullish and not bullish enough.

Money managers are not bullish enough right now.

And last month, their collective positioning dropped to the least bullish it’s been since January. That’s when the price of crude oil ripped 30% higher in four months.

I want to buy into crude oil before the money managers become more bullish.

But I don’t want to move just yet…

Seasonal Bet Against Crude Oil Wins Big

The bears will begin to lose control over the crude oil market this month. And the bulls will take back control.

At the start of May, I showed readers the following chart of my crude oil forecast.

It was a seasonal bet against crude oil. And it unfolded beautifully.

The price reached my secondary downside target of $52.30 last month.

That’s a green light for money managers to start rebuilding their bullish positioning.

And they have…

The price of crude oil bounced 16% from its low in June.

That’s encouraging.

But wait a second…

We’re still in a rough part of the year for crude.

Crude oil might drop again in July — perhaps enough to test its low.

The bulls will gain strength after that. The period from August through October has been pretty good for oil prices in the last five to 10 years.

That’s when I’ll look to strike.

Leverage Crude Oil Prices With Call Options

Matt Badiali recommended the VanEck Vectors Oil Services exchange-traded fund (ETF) on June 17. It’s up about 9% in just two weeks!

Before that, on May 8, I recommended put options on the United States Oil Fund LP (NYSE: USO).

USO is an ETF that tracks the price of crude oil. And put options are a vehicle that lets you profit when the price of an underlying stock or ETF drops.

The price of USO dropped 17% in the four weeks after I recommended put options.

And check this out…

If you purchased put options, you could have made a 263% gain in that time.

That trade has come and gone. But investors can multiply their gains on short-term trends by purchasing options just like that.

While put options gain value when the underlying stock or ETF goes down, call options gain it when the underlying price goes up.

I’m looking to buy crude oil in July.

And one way will be with call options on USO to make triple-digit gains in three months or less.

I’ll let you know when it’s time to make a move.

Good investing,

John Ross

Senior Analyst, Banyan Hill Publishing

 

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