Stronger Euro Providing Fuel for Higher Energy Prices

The United States and Japan seemed to have recently entered a race to see which country can make their currency the weakest in the world. The US implicitly with low targeted interest rates and forecasted bond purchases. Japan explicitly with outright foreign exchange purchases.

The currency emerging strong from these governmental currency strategies is the euro. This is not good news for those hoping for lower energy prices.

Key technical signals, especially the head and shoulders on the US dollar index chart, are leading many longer term trend traders to put on or add to long euro positions. The euro will likely continue trending higher for the next 7 to 12 months.

Unfortunately, the main reason the euro will not trend longer than 1 year will be due to another worldwide recession causing traders to flee back to the safety of the US dollar. The recession will be partially caused by higher energy prices.

The consequences for crude and its refined products will be slowly building price inflation. We are likely to see crude break out of its trading range to pop its head above the $90 level. Participants will remember that it was a strong euro the took crude to $149.

Bleak Outlook for Ethanol Blending Economics

Refiners and wholesalers have enjoyed a few good years of adding extra profit margin to each gallon of gasoline sold by simply blending conventional 87 octane gas with ethanol. Things have quickly changed over the last few months with sky rocketing corn prices shrinking blending profit margins dramatically.

The blending economics do not appear to be improving anytime soon. The 2010 US corn crop yield projection was trimmed again on Friday, sending corn futures to a yearly high trading above $5. This has widened the backwardation of ethanol futures sending the near month CBOT to 2.14, making it on average .15 higher than conventional 87 octane spot.

To make matters even worse, congress is under pressure to do away completely with current biofuel blending credits. The credit is just large enough at today's ethanol prices to make blending slightly profitable.

With wheat prices soaring, farmers will be incentivized to plant more wheat next year than corn, all but ensuring a lower supply of corn for next year. Fuel wholesalers not needing to be in the ethanol blending business should exit now, or at least as soon as contractual storage obligations permit.

Ted Nugent and Strangling the Energy Complex

Trading advice from legendary guitarist Ted Nugent, "I got you in a stranglehold baby..." Not a bad strategy for this market Ted.

For the past year crude has been stuck in a $65 to $84 trading range. Not an easy task to make money consistently in this continuous chop fest. Algorithmic program trading set to tight take profit and stop loss zones, keeps the price wave action tumultuous.

Strangling the market is simply selling same month crude option out of the money calls and out of the money puts simultaneously. Setting strike prices above and below the $19 trading range and moving out several months on the expiration, has been an excellent low risk revenue generating strategy.

With expectations of continuing slow but steady worldwide economic growth, there is really no fundamental or technical reason not to roll over these strangles for the coming year. Watch those parameters closely. If the market breaks to the upside or downside of the past year's trading range, volume will pick up dramatically as traders position for a new trend.