Betting On The 'Other' Oil Black Swan

Tyler Durden's picture

With oil prices plunging to 5-year lows, perhaps it is time to consider the cheapness of betting on the other oil black swan...

 

Via BofA's Jake Greenberg,

In my base case, I remain structurally bearish oil.  The world is making huge productivity and efficiency gains (lighter vehicles, new technology, etc.), and we are starting to see real substitution (e.g. to LNG and CNG).  On the supply side, oil is not resource constrained (i.e. at the right price, you get more shale coming to market + Libya + KRG + North Sea’s Buzzard + Arctic, etc) and OPEC is a dysfunctional oligopoly.  Francisco Blanch thinks we could see Brent drop below $60/bbl in the next six months.
 
Interestingly, lower oil prices may not incentive increased demand as both China and India are taking advantage of the drop to raise taxes on fuel consumption.  Lower crude prices are not being passed on to the end consumers in the markets that matter most for demand growth.  See the WSJ here: India raises taxes on fuels.    And the Australian here: China lifts fuel tax
 
Oil’s black swan...

That said, if oil prices go “too low”, there are some very powerful State actors who could become incentivized to precipitate a geopolitical crisis in order to get oil prices back up.  E.g. a Saudi Arabian spring, or an attack on a major pipeline?  The ISIS-sponsored attack in November in Saudi Arabia’s oil-rich Al Ahsa region did not get a lot of air time, but this is definitely an article worth reading...again from the WSJ: ISIS urging attacks on Saudi   
 
Given this tail risk, I would want to own some long-dated, out of the money call options on Brent within my portfolio.

You can buy the DEC 16 $100/bbl call options (COZ6) for ~$2.50, ~21.5vol.

 
That doesn’t seem expensive for two years of insurance against a supply side shock.  Plus, assuming we see a curtailment of investment, oil could just rise naturally to this price level over the next two years...

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kliguy38's picture

yes......you got it right......

ZerOhead's picture

Will Putin now stage a false flag attack on Saudi oil facilities and blame it on ISIS?

sand_puppy's picture

If I were Putin, that is exactly what I would do.  

That or find some faction in SA that "loves democracy" and "support them" with explosives that could be attached to oil infrastructures....

For freedom, of course.

Escrava Isaura's picture

 

 

Putin is already doing what he needs to do.

 

SilverIsMoney's picture

Don't be so sure... nearly 35% drop in the Ruble vs the Dollar since July that's twice as bad as the Yen yet ZH doesn't talk about it as much.

Is he really a mastermind or is he in over his head? These Western Bankers have been around centuries... there's unitended consequences to every plan, including his.

ChiangMai's picture

There are positive, not just negative, effects of a ruble drop against the dollar.

Major Domestic Benefits with Plunging Ruble

Also, at:

Grandmaster Putin's Golden Trap

...No matter how strange it may seem, but right now, Putin is selling Russian oil and gas only for physical gold...

In this brilliantly played by Putin economic combination the physical gold is rapidly flowing to Russia, China, Brazil, Kazakhstan and India, the BRICS countries, from the reserves of the West. At the current rate of reduction of reserves of physical gold, the West simply does not have the time to do anything against ...Russia until the collapse of the entire Western petrodollar world. 

…Putin sells Russian energy resources in exchange for…US dollars, artificially propped by the efforts of the West. With which he immediately buys gold, artificially devalued against the U.S. dollar by the efforts of the West itself...

 

Escrava Isaura's picture

 

 

ChiangMai

I don’t think Putin is too worried in selling Russia’s oil for gold. Putin, make that the world, wants to sell within their domestic currencies.

 

Anyway, these acts will be seeing by the US as an attack in the US because the dollar would default, thus triggering all the derivatives and so on and so forth. It would bankrupt US banks and US insurances because of credit defaults insurance.

 

Hope this post made sense.

 

ChiangMai's picture

Yes, it did.

And I suspect you'd agree, the "so on and so forth" in "the dollar would default, thus triggering all the derivatives and so on and so forth..." might just as likely trigger World War III as a major NATO attack on Russia would.

More than once I've seen the point made credibly that the most challenging task of Russia — and, perhaps to a lesser extent, China, the SCO (Shanghai Cooperation Organization), BRICS, and the non-aligned nations (about 100 in all, if I recall correctly) — is to manage the imploding US empire in such a way that that implosion doesn't start WWIII, due to the fact that the clowns, criminals, and psychopaths running the US might at some point have nothing left to lose.

Escrava Isaura's picture

 

 

Exactly!

 

These nations would never attack the US; and they are very worried in how not to upset the US, as the US goes down.

 

I will say this with 99.99% certainty: These nations will fail and we will have WW-3 because US won’t go down without a fight because the US has too many allies that won’t say NO.

 

“United States is becoming a failed state, and thus a danger to its own people and the world.” – Noam Chomsky, 2006

 

disabledvet's picture

Hmmmm. 13 billion and counting for the first Ford Class Aircraft Carrier.

2014 Chevy "prepare for the 2015 model year" Cruze sale: $9995.

You do the math...

Save_America1st's picture

I would doubt that Putin would try to fabricate or start any kind of false flag attacks on anything. 

Why should he?  For one, he's already seen how the West's false flag attacks against him have back-fired.  If he pulled the same shit his current popularity would go down faster than obama in a gay club.

He already knows that he's winning and by keeping up what he's doing he's actually forcing the West to create stupid and obvious false flags against him that aren't working.

It's also forcing the West to force sanctions against Russia which directly affects his trading partners (namely Germany and China) who are increasingly distancing themselves from the Western fiat of the U.S. dollar and the Euro.  Germany is soon to exit the Euro...believe it.  They aren't going to take much more of this bullshit from the Euro Union and America.

I don't konw what oil's gonna do price-wise, but Putin already knows as well that America's sanctions are also hurting America's own shale oil prices and destroying those oil companies...that can't go on much longer either before they go bankrupt and then guess what???  Prices will rise on lower output from America.  And Putin is creating tons of new business for Russia's oil in China and elsewhere, so Russia may make up for lack of high price by pumping out serious quantity with their new trading partners....all outside the petro-dollar system as well!

Putin can wait it out.  Russia and China are building huge pipleline deals and China and Russia can finance the construction of those deals by using their huge surplus of U.S T-Bonds.

That's what the big deal is about...they can divest in their immense U.S. T-Bond holdings by using them to finance the construction of their oil and gas deals.

Once that's complete they will conduct business between each other and the rest of the BRIICS via gold or other currencies that just might also then be backed by some amounts of gold.

No matter what this shift is all about divesting from U.S. dollars at the expense of America and once they've flushed all those dollar T-Bonds down the drain that will be when the new world monetary reset takes place.

Bye-bye U.S. petro-dollar and world reserve currency status.

Russia and China and those who are partnering with them now are going to win the day while the treasonous scumbags in D.C. carry on with the destruction of America.

It's all by design...there are no countries or borders.  Just banksters fighting over the world like one big Stratego game.  They win no matter what even if they lose something within the "game".

Best thing we can do is just keep stackin' phyzz silver and gold and other essential supplies:  land, food, water, guns, ammo, hunting/fishing/camping medical gear, etc.

There's still time if you haven't started already...collapse isn't planned just yet.  Could be a year or 10.

But get out of the banking system as soon as you can.  They'll wipe everyone out during the collapse.  Get your dollars out now. 

Soon it will be illegal to withdraw your own money in the bank.  One day you won't even be allowed to have cash or to save cash...it will be illegal to do so.  Banking laws will be created to force everyone to spend everything they have on something without being able to have cash on hand or a savings accounts.  It's the only way to eliminate cash before they try to force us to a purely plastic and digital system.

I hope we don't allow this shit to happen, but I'm 99% skeptical that we won't be able to stop it.  Not unless we have a serious fucking civil war in America and then once we win that war we tell the rest of the world they're next if they don't fucking wake up and get right. 

I won't go down without a fight.  Hope you are all of like mind.

Stack on.  Silver is seriously still on sale.  Don't overlook it or wait for another drop.  Who cares about another drop.  Maybe it will or maybe not.  But who cars.  If there's still supply to be had at these relatively low premiums then fit a good amount of it into your budget a chunk at a time every payday if that's what it takes.  But don't sit around waiting for 14, 13, 12, 11, 10, 9, 8 or whatever...fuck it.  Get it now.  There are no guarantees of supply, delivery, decent premiums, or even anything for sale at those prices.  So don't fuck around waiting.

HardlyZero's picture

Take a walk on the wild side...on BI

http://www.businessinsider.com/why-an-oil-crash-is-exactly-what-obama-ne...

 

Why An Oil Crash Is Exactly What Obama Needs
"It's hard to imagine a single development that carries so many upsides and so few downsides. The domestic economic benefits are obvious," Seib wrote.

 

But with 93% of all jobs created since 2007 in Shale Oil states (at $80 bbl) how will that work out for those states and black swans ? 

Weird red (Matrix) pills out there.

disabledvet's picture

Hmmmm. 13 billion and counting for the first Ford Class Aircraft Carrier.

2014 Chevy "prepare for the 2015 model year" Cruze sale: $9995.

You do the math...

Paveway IV's picture

Bad news: We're well past that point. The clowns, criminals and psychopaths running the US currently have nothing left to lose.

Do you really think they expect anything to get better?

Escrava Isaura's picture

 

 

SilverIsMoney

Putin, or if not Putin, his advisors, knew that oil prices would be attacked. How low we will find out in a near term. I don’t think it’s going to work like in the 1980’s.  

 

Anyway, I am not worry about oil price war so much as I am worried if, or when Israel move troops north, close to Syria.

 

That will trigger a high alert in Europe, thus pushing Putin to act. Then, the chit is about to hit the fan, I believe.

 

 

BringOnTheAsteroid's picture

WWIII will spell the end of humanity.

500 nuclear reactors in the northern hemisphere.

500 strategic targets for enemies of said nations with nuclear power plants.

500 Fukushima melt-downs, melt-throughs and melt-outs.

500 reasons humanity is finished this time.

 

 

Tall Tom's picture

The first shots fired in any war is when the National Treasury is used as the Gun with Money being used as the ammunition.

 

ALL WARS ARE ECONOMIC. Whether or not this escalates to a Hot War remains to be seen.

 

It does not look too promising that escalation will be ceased at this time.

 

Yet on the next World War if it happens...You will not be reading about it on ZH or, most likely, anywhere else. That is a certainty that you can bank on.

Rock On Roger's picture

Oh well, they're all east and south of me.

I should hang in there a couple days longer than most.

cornflakesdisease's picture

The Boys at Dollar inc are pretty smart, given that Satan is their CEO.  They've built their franchise over the last 2oo years.  They're not going to just throw it away over night.

BringOnTheAsteroid's picture

Ummmm, they have been throwing it away for the last 200 years. 

BringOnTheAsteroid's picture

Ummmm, they have been throwing it away for the last 200 years. 

[duplicate - not removed]

ChiangMai's picture

I'm with Escrava.

I'm not aware of post-1999 Russia (i.e. "Putin") ever needing to emulate western clowns and criminals by resorting to war crimes and criminal tactics (and I am sincerely interested in being corrected on this, with one or more well-documented examples).

Stuck on Zero's picture

Exterminating Chechnya? Invading and taking over Crimea?

TheReplacement's picture

Well there was that apartment building and the destruction of Grozny but only something like 50,000 dirty Chechens died so nobody cares.

ChiangMai's picture

You both might want to do some research on Chechnya before again parroting the NYT-CNN-AP-WaPo-ABC-CBS-MSNBC-Fox-HuffPo-Reuters-BBC-NPR-PBS… version of what Chechnya was about.

Regarding "Invading and taking over Crimea":

That's so braindead and delusional it doesn't even merit a response.


Volkodav's picture

Ignorant post

media dumb you down much?

Zombies On Toast's picture

Maybe US shale oil companies, or their bankers, fund ISIS to attack Saudi Arabia's oil pipelines?

bid the soldiers shoot's picture

 

You mean a "failed false flag" attack, don't you?  And not Putin's.

 

ISIS and Saudi are two sides of the same coin.  Much praise for the Good Beheaders and their mock victory over the Bad Beheaders.

noben's picture
noben (not verified) WTFRLY Dec 8, 2014 4:03 PM

This is the 3rd time you posted this today.
Most of us got it the first time.

Ahoy Polloi's picture

As for me, I just got here & am seeing it 4 the 1st time... But I'm like, MEH

Alea Iactaest's picture

You don't like him thread-jacking and shamelessly plugging his own blog?

Jumbotron's picture

Below $60 in six months?    It's 62 and change now !

PT's picture

http://www.infomine.com/investment/metal-prices/crude-oil/all/

When was that spike and crash again?  2007-2008?  My memory is a bit rusty but wasn't it up to $147 then crash to $40?  I never did find out what caused it.  Anyone else know?

When oil started going down recently, all I could think of was the reverse of that spike.  Won't it just crash and then spike high before reverting to its normal path?

Yes, it's true.  I really am clueless about such matters so do not bet money on my funny ideas unless you have a better source confirming them.  Is there anyone out there who can enlighten me?  Why am I wrong?  I mean, apart from my dodgy logic - last time it spiked and crashed then reverted to "normal" therefore this time it will crash and spike and then revert to normal - why else am I wrong?

brown_hornet's picture

PT

Because its different this time.

disabledvet's picture

He meant to say six minutes.

"Maybe even seconds." Fire sale on British Petroleum.

That would be the whole company...

Wild Theories's picture

last time, other stuff were bubble-popping with oil. There was correlation.

this time, other stuff are well-levitated, nothing else is falling, economies are doing great. No correlation.

TheRedScourge's picture

I always suspected that it coincided with the closing of the Enron Loophole. Bush vetoed it several times, until finally he couldn't. Then oil was in a nearly linear descent until roughly the bottom of the great recession.

Freebird's picture

There are at least 15 of you who do not the difference between WTI &  Brent ffs

marathonman's picture

There are many grades of crude oil.  West Texas Intermediate, Brent North Sea, Louisiana Light Sweet, Canadian Syncrude, Maya, etc., etc.  Each grade has its own pricing due to regional factors affecting the ability of producers to get that oil to market.  The shale boom and Helicopter Ben's money bomb paved the way for massive production from North Dakota Bakken and West Texas Eagle Ford shale developments.  Since the pipeline network was designed to carry oil from the coast into the interior of the US, in the last 6 years there hasn't been enough pipeline capacity to carry off the oil from those areas to refiners causing a consistent 10-15$/bbl spread between WTI and Brent North Sea.  For Canadian Syncrude, the discount has been as much as $40/bbl between Brent.  Midwest domestic refiners have been minting money on the differential for the last 6 years.  Now that the Fed money bomb has slowed and the pipeline capacity has turned the flow around, the price difference is shrinking.  Events are conspiring to create a squeeze.  I'm sure there's more fun ahead.

amadeus39's picture

Catch a fallng chain saw? Ooooo, sighed the daring masochist. Let me try?

tc399's picture

The great thing about tunnel vision is that it does not require a worldview.

cowdiddly's picture

And this is what passes for investment advice these days. Noticed he let slip the word betting, which is exactly what his recommendation is, a long shot gamble. Buying calls two years out $40 dollars out of the money on almost anything is relatively cheap for a reason. In two years almost anything could happen and trying to say that oil would be $100 then is pure speculation. Most long datede calls expire as what they are worthless paper.

mt paul's picture

priced in pre collapse dollars

or the new and improved dollar 2.0

LawsofPhysics's picture

Are we all driving Tesla's (that are charged from sunlight)?  No?  Yeah, keep crushing oil.

Thank you.

Karlus's picture

Teslas are powered by the grid which is majority coal. No unicorn tears like Elon would have you believe.

LawsofPhysics's picture

Thanks, I am closing my unicorn position now.