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Oil Woes

Richard Croft
September 1, 2015
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Despite the noise surrounding the recent price action in oil, nothing much has changed. Note our blog published January 23, 2015 (Has Oil Bottomed?) I posited that oil would likely remain in a trading range between US $40 and US $60 per barrel for 2015. So far that is exactly as it has played out.

Make no mistake this is a supply driven story with energy producing countries engaged in a race to the abyss. Revenue shortfalls in countries like Venezuela and Nigeria has caused civil unrest and political instability which may well lead to military coups. Saudi Arabia is behind the curve but has similar issues. The country will have to borrow significant funds in order to maintain the political handouts that have, so far, curtailed any major uprising.

Global demand continues to grow albeit at a temperate pace. Not surprisingly we are seeing robust demand from India whose economy typically thrives in a low cost energy environment. Bottom line global demand is not likely to cause any spikes in oil but it is strong enough to keep oil from falling below US $40 per barrel.

I suspect the pain at the US $40 price point would be enough to cause OPEC and US producers to significantly reduce output. Starring down the abyss has a way of crystalizing one’s thought process.
Energy companies that are bound within a relatively narrow trading range make for excellent covered call candidates. Particularly when buying shares at the lower end of the range and selling covered calls at the mid-point of the range. I posited the energy covered call strategy in January and made three recommendations which would have all been called away earning the maximum potential return.

I suggest we apply the same approach this time. Take a look at Suncor (TSX: SU recent price $36.93) where you buy the shares and sell the SU Dec 38 calls at $1.75. Another possibility is buying shares of Imperial Oil (TSX, IMO, $47.41) and writing the November 48 calls at $2.60.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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