Energy bulls come back to the well
04/07/17

It looks like option traders are coming back to the well in the energy space.

No this is not Groundhog Day: On Wednesday, outsized activity was detected in sector heavyweights like Chesapeake Energy (NYSE: CHK) and Halliburton (NYSE: HAL). Yesterday, buyers turned their attention to Devon Energy (NYSE: DVN) and kept nibbling in Hess (NYSE: HES).

Call volume surpassed puts by at least 4-to-1 in both DVN and HES on Thursday. That potentially reflects bullish sentiment because calls fix the price where a security can be bought while puts establish a minimum selling price. Traders tend to amass the former when they’re hoping for a rally and hold the latter when they’re nervous about a drop.

Take DVN: Roughly 16,000 May 43 calls were purchased in blocks ranging from $1.65 to $1.79. Those contracts will break even if DVN shares climb 4 percent to the $44.65 - $44.79 range by expiration next month. They’ll double if the stock climbs 8 percent to $46.40 and triple from a 12 percent rally to $48.10. But if it fails to move, they’ll expire worthless. DVN closed up 3.28 percent to $42.88 yesterday.

In HES, traders bought roughly 1,500 5-May 49 calls for $1.12 to $1.15. While much smaller, the buying came just one session after 9,000 April 50s were pocketed for $0.25 to $0.55. HES rose 2.18 percent to $48.24.

Most readers have probably heard something about the growth in domestic energy production. If you haven’t, it goes something like this: New technologies like horizontal drilling and hydraulic fracturing have revolutionized the U.S. oil and gas industry.1 This has opened the door to entirely new operations in places like Colorado, North Dakota, and Ohio. In other places like Texas and Oklahoma, it’s lowered costs enough for once-abandoned fields to come back on line. DVN and HES both operate in those kinds of areas.

The other part of the story, as reported by major outlets, is that domestic producers are leaner and meaner after surviving a price war with the rest of the planet.2 Saudi Arabia, after all, flooded the world with oil for years in hopes of gaining market share.3 They, along with the rest of OPEC and the Russia, were forced to retreat late last year by cutting production.4

Yesterday we noted that the overhang from excess supply weighed on sentiment and made energy the weakest major sector in the first quarter. But some analysts have predicted a turnaround in coming months.5 There are even indications that China’s growing thirst for crude will benefit the U.S.6

So the energy story burns bright for another day, fueled by even more big-ticket options activity in an industry that started 2016 left out in the dark. 


1. Wall Street Journal: Too Big to Frack? Oil Giants Try Again to Master Technology That Revolutionized Drilling. 8/16/16. 

2. Reuters: Leaner and meaner: U.S. shale greater theat to OPEC after oil price war. 11/30/16. Oilprice.com: The 150,000 Oil Jobs That May Never Come Back. 2/2/17. 

3. Reuters: OPEC sees more balanced oil market in 2016. 7/13/15. CNBC: OPEC deal shows Saudi oil strategy has backfired, says John Kilduff. 9/28/16. PennLive.com: U.S. vs. Saudi Arabia's OPEC: Who's really winning the oil and gas race? 1/21/16.

4. Reuters: Oil jumps over 10 percent as OPEC finalizes output cut deal. 11/30/16. The Australian Business Review: Saudi Arabia's oil supremacy falters. 3/22/17.

5. Oilprice.com: Why Are Oil Markets Ignoring All These Bullish Signals? 3/24/17. CNBC: One of the world's best-known oil traders is predicting price to recover to $70 a barrel. 3/31/17. 

6. U.S. Energy Informational Administration: This Week in Petroleum. 4/5/17.