The Current Oil Scare Is A False Information Scare

Aug.30.13 | About: The United (USO)

The scuttlebutt (talk around the water cooler) says that an impending war with Syria will endanger the world's oil supply. Many people are assuming that this is because Syria's oil will go offline to the rest of the world. This is a mistaken impression. Syria's oil production is only estimated at about 50,000 bopd. All of this is refined domestically. It is true that prior to sanctions it produced about 370,000 bopd (about 0.4% of the world's oil supply). However, the sanctions have been in place for some time (since 2011 - 2012). Plus Syria only exported 150,000 bopd before the sanctions. In other words Syria is not now supplying the outside world with any oil; and it has not been for a year or more. In fact Syria is a net importer of oil products. A war in Syria by itself would have NO IMPACT on the world's oil supplies.

Some worry that the Syrians would send missiles to destroy neighboring countries' oil fields. However, this seems unlikely. Iraq is a near neighbor. However, if Syria attacked Iraq, it might find itself facing a massive U.S./UN force able to stage its offensive safely from Iraq. Attacking Iraq would be strategically foolish. Iran and Lebanon (at least Hezbollah militants) are Syria's closest allies, so they are out. Israel would counter attack strongly, so a direct, unjustified attack on Israel is unlikely. Saudi Arabia is well armed with U.S. technology. Plus it would again allow staging of U.S./UN forces if it was attacked directly. This only leaves Jordan, Turkey, and Kuwait that could be attacked. Syria probably would like to maintain at least a semblance of friendly relations with Jordan and Turkey, which share long borders with Syria. Kuwait probably falls into the same category as Iraq. All told, unless the governing body of Syria goes completely insane, they will not try to destroy neighbors' oil infrastructure, especially since they are current net importers. Neighboring countries may be the cheapest place for Syrians to get oil.

On top of this the furor for an armed response to Syrian use of chemical weapons for mass genocide has abated in some countries. For instance, Thursday August 29, 2013 British lawmakers voted against military intervention in Syria. Most recession laden EU countries cannot be anxious to start a war at this time either. This is why senior political analyst at Nomura, Alistair Newton, believes the strike may be a U.S. only strike; and he believes that will be delayed until after the G20 summit September 5-6, 2013. A lot in the U.S. are also against an armed intervention in Syria. Hence it is by no means certain that the U.S. will mount a major attack on its own. If it did, the U.S. would have little or no backing from its allies. Further Alistair Newton believes that U.S. strike or no, there will be little impact on the global oil supply.

Rather contrary to the oil shortage thesis, the world may soon have more oil than most had been predicting. The Nigerian National Petroleum Corporation says Nigeria's oil production is set to rise to 2.5 million bopd. It should be producing 150,000 bopd more at any time as work on the Nembe Creek Trunk Line is expected to be fully completed any day. This extra oil production should funnel directly into the world global supply. Saudi Arabian oil production increased by 150,000 bopd to 9.95 million bopd in August 2013 in an effort by Saudi Arabia to assuage any worries about world oil supplies. The Libyan port of Marsa al Brega resumed exports of 90,000 bopd as of August 26, 2013. A Libyan oil ministry official, Ibrahim Al Awami, said August 20, 2013 that the ports of Zueitina and Hariga were ready to resume oil exports. The protestors have been expelled. However, only Marsa al Hariga is said to have "entered duty" so far. This is an additional 110,000 bopd. The prospects of more Libyan oil exports coming back online seem to be improving. This could mean another 800,000 bopd in coming months. In other words, the world oil supply has been improving over the last few weeks, not worsening.

Some yell crisis due to rioting in Egypt. However, Egyptian consumption exceeds its production. It is a net consumer (see chart below).

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Some worry about the disruption of traffic through the Suez Canal. However, Egyptians are not rabidly anti-US or anti-Europe. They want the money that the Suez canal generates. In fact their biggest problem is that they don't have enough money (and so food) or enough jobs. Plus a disruption of the Suez Canal traffic might bring outside interference. They do not want this either. They do not want the U.S. or the EU to dictate their politics.

Then there is the cry of peak oil; and this will hit the world eventually. However, all of the new unconventional oil fields in the U.S. (and those beginning elsewhere) have significantly delayed any problems associated with peak oil. The IEA Medium-Term Oil Market Balance chart below shows clearly that World Supply Capacity Growth is exceeding World Demand Growth currently; and it is forecast to continue to do so at least until 2016.

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In other words, those crying "PEAK OIL TROUBLE" are factually incorrect in the near term. It will be several years before PEAK OIL will be a problem; and it is unclear that still more production won't be developed in the meantime. For 2013 and 2014 oil prices are likely to go down from here. There might be some uniformed (or disreputable manipulators) who will still try to push them up. A strike by the U.S. on Syria might help them sell this. However, the reality is that oil is a sell currently. The world economy is growing slowly; and it is not likely to start growing more quickly soon. Further India is increasingly in more dire trouble economically; and that trouble may spread to China soon, especially if energy prices start to go up; or even if they just remain as high as they are.

This whole oil scare has been manufactured by people who wanted to manipulate oil prices upward. You can be sure they made money by doing so. However, investors can probably make money by going short oil with futures, with options, or by shorting ETFs and ETNs (or by using short ETFs and ETNs) which control large amounts of the oil commodity. A couple of short oil ETFs and ETNs are:

ProShares UltraShort DJ-UBS Crude Oil ETF (NYSEARCA:SCO) -- 2X performance

PowerShares DB Crude Oil Double Short ETN (NYSEARCA:DTO) -- 2X performance

Alternatively you can buy put options (or put option spreads) on United States Oil (NYSEARCA:USO) -- a WTI related ETF which also incorporates heating oil, gasoline, natural gas, and other petroleum based fuels. It is heavily WTI weighted. An added benefit is that the fund tends to lose value as the oil futures it invests in cost a few percent to roll every month. Thus put options will benefit from this small price loss every month. This ETF also has the benefit of being highly traded with average volume of 5.8 million shares per day. Many of the other ETFs and ETNs are much more lightly traded.

The one-year chart of USO provides some technical direction for this trade.

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The slow stochastic sub chart shows that USO is near overbought levels. The main chart shows that it is far above both its 200-day and its 50-day SMAs. Since it historically cycles around its 50-day SMA in relatively short periods of time, it is overdue to cycle downward below its 50-day SMA again.

With the end of the summer driving season at hand, a cycle downward seems likely in the very near future. An attack on Syria is a wildcard. The market manipulators could be successful in driving prices up again (or further). However, oil prices seem sure to go down in the longer term. USO should be a good short. Any of the other ETFs and ETNs listed above should work too. I would expect a return to the $34 level within the next two months. Shorting oil is worth some investor attention, especially if you are an aggressive investor or trader.

There are of course those who swear the world economy is about to take off. However, both the World Bank and the IMF recently lowered their World GDP growth estimates. The pumpers of the world economy are more likely to be disappointed than others are to be surprised by unexpected extra growth. Remember U.S. Durable Goods (-7.3% for July) missed badly. New Home Sales missed badly (394K versus an expectation of 485K and a prior 455K). Pending Home Sales missed (-1.3% for July). Retail results for Q2 2013 were generally a big negative surprise. Consumers drive the U.S. economy. The pumpers are more likely to see slowing than a big pick up. This means oil is a good short over the medium term (and perhaps the short term).

NOTE: Some of the above fundamental financial data is from Yahoo Finance.

Good Luck Trading.

Disclosure: I am short USO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.