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Monday, February 28, 2011

This Stormy Monday, It's All About Oil

Whither Oil ? In her SEEKING ALPHA piece, Dian Chu tells us [emphasis mine] ...

expect a market correction at the next contract rollover around March 8. Technical indications suggest WTI crude could easily correct to the $90 levels, heating oil to the $2.60 levels, and RBOB to the $2.50 levels. From a trading and investor’s point of view, the size of the correction would be worthwhile to go in and short the April crude, RBOB and heating oil.
Fed’s QE2, a weak dollar, recent upbeat economic data and a cold winter season has provided support to crude product prices. However, as winter ends, QE2 expires in June with QE3 an unlikely scenario, and China cools off its economy to fight inflation, gasoline and distillates probably have already seen their highs for the year already.
Ian Bezek lists ' 7 Reasons Crude Is Going to $80/barrel ' : high current crude inventories ; slowing global recovery ; "geopolitical pressures should blow over" ; "geopolitics cannot drive the oil price in the long run" ; Oil historically overvalued compared with natural gas ; U.S. dollar is stronger than in 2008 ; Oil faces significant price resistance.

Erik Wright concurs that "oil prices cannot have too far left to go", and are due for a short-term correction, yet urges caution about taking short positions on oil. Even so...
As for bearish investors on oil, buying the following ETFs or buying calls for the following ETFs provides an easy way to make money when oil decides to pull back to reasonable levels.
    * PowerShares DB Crude Oil Short ETF (SZO)
    * PowerShares DB Crude Oil Double Short ETF (DTO)
    * ProShares UltraShort Oil & Gas (DUG)
    * ProShares Short Oil & Gas (DDG)
On the other hand, investors can also short sell the long ETFs to make money when oil falls. Many investors prefer doing this as many of the bull ETFs tend to be more liquid then the bear ETFs.
The following are a list of long ETFs that can be used to short sell or buy puts on to make money when oil pulls back. Investors may also consider taking a long position or buying calls for the following ETFs once the oil pullback has been completed.
    * PowerShares DB Crude Oil Long ETF (OLO)
    * PowerShares DB Oil (DBO)
    * ProShares Ultra Oil & Gas (DIG)
Meantime, Cliff Wachtel maps out the likely economic/market outcomes of the Libyan/MENA (Middle East/North Africa) political crisis and lists specific winners and losers 

Losers :
Most Libyan oil goes to the EU, so supply affects will be felt there most of all.
In short, 78% of that 1.7 million barrels/day, 1.33 million barrels, goes to Europe, over 540 million/ day just to Italy.
Therefore global stock indexes in general suffer, especially those with more Libya, MENA and EU exposure.
* Major Global Stock Indexes and their related ETFs: SPY, DIA, .N225, SSEC, BSE
* EU stock indexes and related companies, especially those with heavy Libya ties, including:
* Italy
* Stock Index: FTSE MIB Index, or its related ETF, the iShares MSCI Italy Index ETF (EWI), related stocks: UniCredit (NYSE: UCG), Fiat (FIATY.PK), Eni (ENI)
* Germany : Index DAX (.GDAXI), and its components with strong Libya ties
* Oil companies in Libya: ENI (ENI), BASF (BASFY.PK), Total SA (TOT), Marathon Oil (MRO), ConocoPhillips (COP), Repsol (REP), OMV AG (OMVKY.PK), Hess Corp (HES), Occidental Petroleum (OXY), Statoil ASA (STO)

Winners :
 * Stocks: Oil companies without Libyan exposure: Exxon Mobil (XOM), Chevron (CVX), Noble Energy (NBL). Anyone else without Libyan or MENA exposure too, but these are the obvious ones.
* Commodities & Related ETFs:
          o Oil: (USO, IYE, IGE, XLE, VDE) – NB: haven’t yet seen a really good oil ETF that actually tracks oil well. Ideas? Obviously those with actual commodity, option, or binary option accounts can trade this directly, same goes for the commodities below.
          o Gold (GLD, IAU, ABX, AEM)
          o Silver: (SLV)

Finally,  Steven Jon Kaplan argues that longer-term we should see much lower oil prices due to oil-states' need to placate their restive populations.
There is no way to know for sure whether or not there will be actual democratic governments in some countries like Egypt, Tunisia, and Libya, or whether one form of autocratic or oligarchic rule will simply be supplanted by another. One thing, however, is for certain: the masses have made their voices heard and will continue to demand actual governmental intervention. The simplest form of intervention is to set up or expand social programs of various kinds, along with extended public assistance and related projects. All of these require government funding, and the only way that a major oil-producing nation can generate such funding is by producing more oil.

The key to the balance of power is that in past years, the necessity to maintain an oil-price monopoly trumped concerns about social unrest. This equation has now become inverted. Going forward, maintaining social order will be more important than ensuring the highest living standards for the ruling elite. In order to maintain their hold on power, they will have to make some concessions, and they must pay for those concessions from increased crude oil production. 
In support of this thesis Kaplan points to spending plans in Saudi Arabia and Iraq.
Therefore, over a period of one or two years, we are likely to see a huge increase in oil production in those countries which are either directly threatened by political unrest, or who believe they may be threatened and choose to act preemptively to prevent discord. As the OPEC cartel crumbles under this new world order, the price of crude oil will plummet. There is constant chatter in the media about when regular unleaded gasoline will once again exceed four dollars per gallon, as it had done in the late spring and early summer of 2008. The exact opposite will occur: the price of gasoline in many parts of the United States will sell for less than two dollars per gallon, as it did near the end of 2008 and for the first several months of 2009.
We are not likely to see such a dramatic plunge in the next year, since we didn't get as high in the first place. However, it is quite possible for crude oil to lose half of its value by 2012, thereby putting it close to 50 dollars per barrel. Especially with everyone looking up, a downside bet is almost certain to be highly profitable. It is like betting on a horse race in which the favorite has the longest odds.

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