Don’t Be Crude

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Let me guess, you’ve probably heard about "Peak Oil?"

This is the study that shows we have literally “peaked out” in the global production of oil, and that soon we will run out.

Some people are scared by this concept.  After all, when you really sit back and think about it, doesn’t oil play an important part in nearly everything we do?  Wouldn’t prices of oil explode to the point where hardly anyone could afford to even use it?  Wouldn’t we have to protect ourselves from the chaos that would surely ensue once we ran out of the stuff?   Wouldn’t the world end as we know it?  Yikes!

Of course others are thrilled by the idea of peak oil—it’s time we started living off the land again!  And isn’t walking much healthier than taking the car anyway ?

I’m not one to be thrilled or not thrilled about the concept of peak oil.  My job is simply to trade the trend and make money from that trend.

If you have heard of peak oil, then what I’m about to say is going to surprise you.  Especially if you’ve prepared a bunker, stored your food, and have your escape plan ready to go.

Because . . . it’s time to make a bet on the downward price of oil.

Say what?

I’m a trader and I look at the big picture (years and years out), intermediate picture (6 months to a year) as well as the short term picture (a few weeks out to a few months).  While the big picture supports peak oil, the short and intermediate term picture does not.

Why?

The global economy is coming to a standstill.  Prices of copper, a key economic indicator for the health of the world economy, are plunging, down 25% in the last two months alone.  Growth rates for both the USA and UK have recently been lowered by the International Monetary Fund.  And, as I’ve been saying all along, the higher prices in the ten year notes we’ve been seeing (starting over three months ago) have told us the story loud and clear—a global recession is coming at us like a freight train.  Adding a few new jobs in the solar energy field isn’t going to help.  There is nothing anybody can do to stop it.  Anyone who is in denial of this fact is going to be in for a rude awakening.

As a result, peak oil or not, the demand for oil is sliding and will continue to slide into the near future.  From a recent high of $115 per barrel, oil prices have slid back to $85.  The technical picture on the weekly and daily charts continues to deteriorate.  In addition, the US Dollar is getting stronger (it always gets stronger in a global recession).  Since oil is priced in dollars, a strong US Dollar in and of itself is enough to push the price of oil lower.  And that, coupled with shrinking demand over the short and intermediate term, means one thing and one thing only: the price of oil is going down.

How far down is it going to go?  And, more importantly, how can you make money on this trend?

The Exchange Traded Fund USO tracks the price of oil very closely.  I’m looking for oil to head back down to $70 a barrel over the next several months, and I wouldn’t be surprised to see it push below $70 before the economy stabilizes.  The fact of the matter is, when economies contract, oil usage drops, and sometimes it drops considerably.

USO is currently trading at $34.00 per share.  I’m looking to short this stock at current levels, with a $3.00 stop loss and a $5.00 target.  I’m also looking to buy December $35.00 put options at current levels, utilizing the same stops as discussed above on the underlying stock.  That is, if USO rallies $3.00, then I’ll close out my put position for a loss.  If USO falls $5.00, I’ll close out my put position for a very handsome profit.

The key with trading is to be flexible in observing what time frames to trade.  Yes, the fundamental long term picture on oil may be grim.  Supplies will get tighter and tighter over the years and decades ahead.  That’s a fact.  But we are interested in making money now, in the present.

There is no market, no trend, that goes straight up or straight down.  By being nimble and flexible we can be positioned for the long term trend—the big picture—while catching the shorter term ebbs and flows for additional income.

Successful trading,

John Frederick Carter

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