Take the fear premium out of crude and suddenly it is worth %50 a barrel. Saudi Arabia is ramping up from 10 to 15 million barrels a day of production. What happens if Libya’s Muammar Khadafy suddenly chokes to death on a falafel. (USO), (DUG).
Let’s do some out of the box thinking here. Let’s say that the global economy is really slowing down. The demand for oil will fall. Let’s say that China continues to raise interest rates, slowing its economy further. Then Chinese oil demand starts to wane.
Then we bring on stream new US onshore supplies opened up by advanced technologies in places like the Bakken field in North Dakota. Then current high prices at the pump deliver a summer driving season that is a shadow of its former self. Next, the exchanges get religion and decide to damp down speculation in earnest by raising margin requirements on oil.
Now, let’s thrown in an outlier. Muammar Khadafi chokes to death on a bad falafel, bringing the Libyan civil war to an immediate end, and unleashing 1.2 million barrels a day of light crude on the European market.
What I have just outlined here is a perfect storm for oil prices. It’s not that these are low probability events. They are in fact the most likely scenario that will unfold over the next three months. And they are all likely to hit at the same time, taking crude down to the bottom of the last year’s range of $84/barrel.
So I think that it is prudent here to start adding some short exposure for oil. Selling short the US Oil Fund (USO) might be a good idea, which has one of the worst tracking errors in the ETF world, and never fails to rob investors blind. Play this from the short side, and these gross inefficiencies work in your favor. When I employed this strategy through the put options in March, I scored a near double in just five days.
Just to add a little kicker to your short oil play, you might buy the (DUG), a -2X inverse short ETF on the oil majors now trading at $29.25. Falling oil prices will lead to plunging oil company profitability, shrinking PE multiples, and sharply declining stock prices, all of which work in favor of (DUG). Throw in a broader global risk off trade, and this thing works with a turbocharger.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
What is really key to commodity prices in general is the absolute level of money in the economy.....
The absolute level of money is best represented by a number which would represent all credit and equity.....
In 2006 let´s say the total number was 100%.....
Now let´s try to guess what portion of the 100% number is going to be present in 2012-14.....
So when one includes the QEs.....what would be the number......
Since the private credit-debt side of the 2006 number was over $42 Trillion....whereby the 2012-14 private credit number may be 50% or less of this number.....not including economic decline.....increases in taxation.....etc....what is the mechanism that will make up for a greater than $20Trillion shortfall.....
Energy prices in general could easily decline over 50%.....
lets not forget how many oil wells were capped off in 2008 and how many more were capped off in 2010. just putting them back in to production would put thousands back to work here in the USA and begin to reduce the price of oil. (and of course gas at the pump)
Another item on the agenda is position limits....which notably when this came up for addressing with GS Gensler.....nothing was done.....
So the question is when and if the position limit item will be addressed to keep firms like GS from manipulating the energy markets.....
Everyone has a short memory....but I am sure that everyone remembers $140 oil which went back down to $45.....If position limits were imposed ....this would have never happened.....The acid test being that demand for oil had not changed during this run up in prices.....
Notice that nothing has been said further about the postponement of addressing this item via the CFTC headed by GS Gensler.....
If there is even a whiff of position limits being implemented....oil prices will drop like a stone.....
1. Saudi Arabia is ramping up from 10 to 15 million barrels a day of production.
a; they are always raising production, but they never raise production.
2. What happens if Libya’s Muammar Khadafy suddenly chokes to death on a falafel.
a; it will not make the damage at the oil pumping storage / pumping sites any less catastrophic
3. Let’s do some out of the box thinking here. Let’s say that the global economy is really slowing down. The demand for oil will fall.
a; the reality is that oil can NOT! keep up with demand and that is why the economies are NOT! growing!
Here watch this.. and I think I have posted this for you before.. and get caught up to the real world so that you can make real treades based on real information.. its all good to coat tail ride the sheep.. its safe, to a point.. safer lately than being infront of them per FED Transitory Manipulation.. but still, its not very manly.
http://www.youtube.com/watch?v=wYuLjGQQ-jg&feature=related
even when the saudis manage to ramp up production, its short lived and comes at the expence of maintance work which leads to a fall in pruduction a few months later. really fed up of hearing about the saudis ramping up, its bull. what idiot junked you for saying the obvious
Also, very little is said about how S.A. consumes larger and larger shares of its gross output. Same in Iran, Venezuela, Libya...
Since madhedgefundtrader loves "Ifs", what will happen IF Saudi Arabia starts to look like Yemen or some of its oil terminals are under an attack?
Taking into account the "Arab Spring", this possibility is much more probable.
Just remember, the world is very unstable and the present US military capabilities are limited.
Here's a blast from the past...the Grandpa of J6P of the USA gave all cheap oil, and yet this is what we get, eternal war to keep gasoline at $5 or less. Interesting +worth the time to learn here, about 15 mins each. See: http://www.archive.org/details/DesertVe1958 and see: http://www.archive.org/details/DesertVe1958_2
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