Isn’t it funny that Oil Prices have been drifting lower through the post-tsunami market carnage? What about Qaddafi and Libyan unrest now?
In context of nuclear, oil is an alternative energy too, but it has diverged – going down into the mid 90s this morning. Reuters told us there were six refineries that account for 31% of Japan’s output that shut down after the quake and it was uncertain when they would reopen.
With about 25% of its energy coming from nuclear, these closures mean Japan will surely need to step up its imports of all things petroleum.
So why is Oil down the past three days? I’ll give you one obvious reason and tell you one nasty secret.
Oil priced in widespread Middle East revolution – didn’t happen.
The Oil rise was accounted for by the Middle East news, which topped out last week around $105usd. As I explained then, the Middle East revolution was now baked in, and any sign that Libya wouldn’t suffer the same fate as Egypt would send Oil prices back down. Now, even though relatively mild unrest goes on in Bahrain and Saudi, and Japan’s future energy needs are quite obvious, Oil Prices are feeling the effects of gravity.
And although a full flung Saudi revolution is not impossible, that scenario is not nearly the worry it was two weeks ago. Just think – prices had been driven so high out of whack, that even a disaster in the world’s second largest net importer of Oil wasn’t enough to keep Oil in triple digits.
Triple expiration and USO
A lot of investors, and even advisors, make the mistake of equating supply disruptions and increased demand for an immediate pop in Oil prices. But then to aggravate that mistake, they put client money in the United States Oil Fund (USO). They just don’t know how it works underneath.
Deep in the guts of the market, call options trades on Oil are their highest since July 2009. That means a lot of people are long Oil right now, likely bought when Oil was north of $100usd, and losing their bets. As they get out or roll-over (for futures) in the next week before options expiration, it will only pressure Oil further down – more sellers than buyers, ’nuff said.
Who is the biggest buyer of those call options and futures? It’s the USO ETF, and every Wall Street shop knows it has to roll-over to the next month.
Strike 1 is all the fees USO has to pay to roll over – about 1% every month. So that’s 12% right there over a year of loss. Strike 2 is the smart money attacks it like a huge sitting duck. It’s easy to make money at poker if you know the opponent’s cards, right? This is the exact same.
DISCLOSURE: no positions held.
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