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The Bear Case for Oil
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.
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50% fear premium??? Really? Where exactly are you getting those numbers? If anyone trades on this analysis, I wish you good luck or that you supply falafel to Khadafi.....
PS. Brent crude is off 15% in the past 3 weeks, maybe this trade should have been published in early May??
Some people here just love to use calculus and cryptic theories to answer something which is most easily answered with basic math and history.
Occam's Razor: one should not increase, beyond what is necessary, the number of entities required to explain anything.
Oil be seeing you...up the slippery slope.
Useless rambling. Lot's of "ifs" and "buts". This guy must have really lost some money. Yeah, here's some "out of the box" thinking for you. What if unicorns really do exist? does that mean all that "mark to unicorn" accounting by the big banks on wall street will be an accurate description of reality?
oil will rise back up. Iran on verge of war. Shitstorms brewing n cropping up everywhere.
what if space aliens land tomorrow and provide us with all the energy we need in a device the size of your brain?
Yeah! And take the manipulation out and you get a free market!
Dreams my friend, but thanks for sharing the trade ideas.
When someone uses the word "manipulation" in the same sentence as "oil prices" I know they really understand the markets!
If it goes below $80 it will not stay there very long, a time to buy?
What happens if King Abdulla of SA chokes on an asprin?
Wait, didn't it take a major recession to bring oil to the $50 level (and it did that briefly)?
Is Kaddafi choking on a falafel really a high probability event? In the next 3 months? Even if the fallafel is mounted on a cruise missile, this seems optimistic (he's escaped several bombing attempts of this type).
Do we really think the middle east risk has hit it zenith and will settle down?
Does anyone actually believe Saudi Arabia's jawboning anymore?
Oil might trade down violently with all the derisking, but the idea that it will stay there with such strong fundamentals in place is absurd.
'Kadafy' will more likely choke on a bunker buster.
How about leaving the fiat paper chits out of it entirely? The gold:oil ratio averages about 15 over a multi-decade period. At $1500 gold and $100 crude, everything is just fine and dandy.
Of course I am a stubborn proponent of the 'zero real rate of return due to zombie bank wealth destruction' theory of markets. Might as well stop chasing phantoms and just save more, consume less and deal with it. No bond haircuts for banks = crippled financial system for decades.
Oil and gold are just swell. Try stopping the devaluations and corruption, and then we can talk.
"How about leaving the fiat paper chits out of it entirely?"
So what you are suggesting is to completely ignore the reality of what oil is traded with and concentrate on some gold fantasy? Hell, why not just figure out what oil is worth if it were traded for goats? It's equally as rational as what you're now suggesting.
I am suggesting that the post is missing important elements of commodity valuation.
It's OK that you don't get it. The bubble of unknowing is strong with you.
It seems to me that you derive some pleasure from obfuscation. You try to make something seem more complex than it is in an effort to make yourself appear more intelligent than you are all the while failing to realize that true intelligence simplifies while false intellect obfuscate.
http://en.wikipedia.org/wiki/Psychological_projection
goat oil...
cat sweat is the future
and dog pants
Ah er, but goats are traded for oil in the middle east and in India and Pakistan. The original point was in regard to the gold/oil ratio. What was the point of criticism fucknuts? You can turn gold into the "fiat du jour" very easily. Pretty clear to me that PMs are becoming (again) the default "money" during any "transitory" phase.
Gold and silver is not becoming the "default money" it is merely playing out it's historical role as a place to store value when currencies are unstable. It's not new, it's just history repeating.
Actually oil output has decreased, not from a lack of trying though. Remember peak oil?
It's happening. Even with Iraq...prior to Gulf war 2 was doing around 8 million per day, now is only pumping around 3.5 million. Saudi Arabia itself is well under the target 10 million barrels per day, so far the best day has netted 9.1 million depending on how much salt water they pump into the wells to get those last drops in the reserviors.
Don't pretend that the top 20% in both India and CHina can't out purchase the bottom 50% in the US. Because they have been, this isn't a wild speculative guess, the IEA has been jumping up and down about it for three years and quickly ignored. Want to find out what's happening in oil and gas. Two sources, the Oil drum and The Northern Miner ( (expensive but worth the grand a year).
Peak Oil has come and gone, now it's race to steam power, canal systems and horses/ranching again.
As far as Libya...no one cares except Italy. 80% of their imports are from Libya. The rest of europe is nearly fully dependent on pipelines heading in from the East or, if England...anyone that will sell it to them.
This is the first Canuck long weekend that has gone contrary to typical pricing. As in, it's decreased. Something is coming down the pipe soon, and it's not oil.
Wrong about Iraq. According to EIA data, Iraq's max production was 3.48 million bpd, in 1980. So far this year, production is around 2.6 million mbpd.
i get the felling that oil is priced in euros, the price nearly always goes up when the euro is strong and falls when the euro is weak, or am i missing something
and when a dictator wants to price his oil in Euros, he gets invaded
the euro moves in the inverse of the USD therefore, as the euro rises and oil rises the dollar is falling and vice versa. Oil is priced dollars...on that issue there is no debate.
Oil prices rise and fall in accordance to the value of the USD, end of story. Until anyone can point to a prolonged period of time in which the price of oil climbs as the USD is also climbing or falls as the USD is also falling...all this talk of peak oil, fear, rage, supply, demand, etc will be nothing but a bunch of intellectual masturbation. It's purely dependent on the dollar value and it IS THAT SIMPLE.
No, you don't understand. The oil spike in 2008 was pre printing. The dollar is measured in oil, not vice versa.
I know recognizing the inexorable decline of life(style) is an excruciating thing to grasp if you have children whose lives you know will be miserable, but you are harming them if you deny what you can see.
The 1900s were the century of oil. Technology advance was fueled by it. Population growth of about 600% was fueled by it. America's dominance was fueled by it.
It's all going away and there is no fix, other than to militarily suppress consumption of others.
And what was the USD at on 7/7/08 when oil hit 147? Was it not close to it's all time low? Mere coincidence I suppose huh?
No, you don't understand. The oil spike in 2008 was pre printing. The dollar is measured in oil, not vice versa.
I know recognizing the inexorable decline of life(style) is an excruciating thing to grasp if you have children whose lives you know will be miserable, but you are harming them if you deny what you can see.
The 1900s were the century of oil. Technology advance was fueled by it. Population growth of about 600% was fueled by it. America's dominance was fueled by it.
It's all going away and there is no fix, other than to militarily suppress consumption of others.
"The dollar is measured in oil"????WTF???????
I am going to buy the new TELSA SUV.....all electric....
for $30,000.....and will never buy oil for fuel again.....
THIS is another reason.....
And I WILL be going 100% solar at my home.....
This is another reason....
There will be more people like me.....
No doubt about it.....
I just reduced my oil footprint by 95%....
In the year 2014.....
Keep that in mind.....
dup
half correct
we are running out of a valued dollar AND we are running out of easy oil AND those two things are related
Nope....
The dollar was debased by $42 Trillion in private debt....the baby boomers....
This is now going in reverse.....
And the baby boomers have not been duplicated.....
The value of the dollar is demographically driven via private credit.....
Baby boomer coefficient .80x.....
Fed coefficient.....20x.....
Largely correct....
And because of the dramatic drop in private credit that the QE cannot override....presto there are far fewer dollars out there than before......
And much to the surprise of the many....the dollar is going to rally.....and rally big time.....
Because BRIC....Europe etc...are going to have their day....soon....the EURO may not even be around.....or not what it was set out to be.....
You are a complete jerk.
According to you (paras 1 and 5), KSA is ramping oil production from 10 million bpd to 15 million in the next 3 months. Of course, that's complete BS. Even the most optimistic analysts think that KSA can max produce 12.5 million bpd. Most likely, they have almost no ability to produce significantly more than they do now.
Do some research and wise up.
they're not even at 10. Maybe 8.9 or so.
It's unclear whether they ever got to 10. When they were saying they were at 12, maybe they were at 10, who knows?
Nevermind the export land model where they are consuming increasing shares of their own production.
Production doesn't even really matter; it's production available for export to countries like ours.
10 million "all liquids" ; around 8.5 - 9.0 million crude & condensate.
Peak oil, man made global warming, or terrorism. Can't decide which is the biggest crock of shit.
because you have evidence you are going to share with us on how oil production can grow forever, right?
Moron
I hope you are right, it will be BAU. If you are wrong about peak oil or global (weather chaos) warming it is much too late to do anything about either of them.
Saudi Arabia cannot raise their output. I guarantee it and will eat crow if I'm wrong.
If China's economy slows down enough to have a meaningful impact on oil prices, we have far bigger troubles in store.
Gaddafhi's death will not entail immediate stability and the resumption of full production.
You are silly.
Tyler, this CLOWN has a First Amendment right to write this CRAP, but you DO NOT have to publish the CRAP.
Let´s make this even simpler.....
In 2006 .....there was $100 in the economic box......
In 2012-14
....There will be less than $50 in the economic box.....
What is the probability of commodities increasing in price.....when the total money available has dropped by over 50%.....
Are you too dense to see how it's related to the US dollar or have you simply chosen to ignore this most obvious of facts?
So much nonsense pontification about the why's and what's of oil price yet no mention of the actual currency oil is priced in? And people actually pay for your advice? Jesus fuckin christ!
Hi. I'm a long time ZeroHedge follower.
Come follow my financial chart blog at http://deadcatbouncing.blogspot.com/ and see just how wrong someone can consistently be ;)
This is close to what peak oil theorists predict. Oil prices will go up then down then up then down. Each top may be higher than the previous and each low higher than the previous.
I suggest you read some of the articles at The Oil Drum about Saudi Arabian oil. There is a consensus there that they have reached peak output, for example Saudi Arabia did not make up for the Libyan oil decline:
http://www.theoildrum.com/node/7801
This is an easy fade. The ramp in oil has less to do with supply/demand, and everything to do with speculative hot money ala the Federal Reserve. I would be VERY careful shorting anything right now. IMO, the play is 20% gold and 80% cash.