Numerous facors affect oil price: demand, supply & production, seasonal refinery conditions, economic trends, speculation and geopolical pressures to name a few. My intent is to ouline a swing trade that has strong potential over the next several weeks. Some of the data submitted could also be used to support long trades as recurring seasonal events transpire. The March – mid-May period is typically very good period to swing long crude oil and related stocks.
In the following annotated pictorial, I outline my current bear stance on crude oil. I Currently hold substantial positions in ERY, SCO & DUG. Absent an extrordinary geopolitical event, I intend on holding these position through at least mid January perhaps as long as first two weeks in February depending on relative price trends.
Base charts & graphs courtesy of yardini.com and eia.gov
US domestic demand is weak, surprisingly weak considering the “growth” in the economy that is often touted.. 2011 petroleum usage is well below 2007- 2008, 2010 and very similar to usage levels during the 2009 recessionary period.
US domestic Supply. Supply is above average of past five previos years ranges.
US Production continues to impress. The growth in domestic production can be atributed to new unconventional fields & techniques and an ever increasing rig count.in the oil sector. Drilling risg have been moving from the natural gas fields to oil fields for more than 18 months. Much of this increased drilling is just beginning to show in higher production. I expect this trend to continue unless there is a dramatic a sustained fall in crude oil price or substantial increase in natural gas price.
Refinery maintenance / seasonality
Historical pricing trends
Excess speculation. Speculative long postion are at least double the 10 yr average. I expect this speculation to rebalance quickly if / when the next recession becomes evident. A reversion to the mean would be expected even if slow growth is acheived.
Geo-political
Iran and its leaders continue threatening to shut the Strait of Hormuz if new sanctions/ embargos are instituted against them. In recent weeks this has supported the price of oil, especially in the US / WTI pricing. In my opinion, this has artificially increased the price and in fact improves the risk / reward of short oil positions . The one caveat is to have firm stop-loss orders in place, just in case the Iranians actually try something foolish.
Background http://www.eia.gov/countries/regions-topics.cfm?fips=WOTC&src=email
” On average, 14 crude oil tankers per day passed through the Strait in 2011, with a corresponding amount of empty tankers entering to pick up new cargos. More than 85 percent of these crude oil exports went to Asian markets, with Japan, India, South Korea, and China representing the largest destinations….At its narrowest point, the Strait is 21 miles wide, but the width of the shipping lane in either direction is only two miles, separated by a two-mile buffer zone. The Strait is deep and wide enough to handle the world’s largest crude oil tankers, with about two-thirds of oil shipments carried by tankers in excess of 150,000 deadweight tons….Closure of the Strait of Hormuz would require the use of longer alternate routes at increased transportation costs. Alternate routes include the 745 mile long Petroline, also known as the East-West Pipeline, across Saudi Arabia from Abqaiq to the Red Sea. The East-West Pipeline has a nameplate capacity of about 5 million bbl/d. The Abqaiq-Yanbu natural gas liquids pipeline, which runs parallel to the Petroline to the Red Sea, has a 290,000-bbl/d capacity. Additional oil could also be pumped north via the Iraq-Turkey pipeline to the port of Ceyhan on the Mediterranean Sea, but volumes have been limited by the closure of the Strategic pipeline linking north and south Iraq.”
