Global Financial Crisis Makes Oil a Great Hedge

Includes: DBO, OIL, USL, USO
by: Jason Schwarz

The global slowdown is here to stay and the best way to play it is with oil (NYSEARCA:USO) puts.  One could argue that even without a global slowdown oil puts would be a great investment (as in here); with the global slowdown, this one’s a no brainer.  Crude oil prices reached a bubble high of $147 in July after a seven year climb.  With current prices hovering between $90-$100 a barrel, this commodity has a long ways to fall.  There are various ways to play the global slowdown (for other ideas check out our investment newsletter at but this one trumps them all.

Earlier this week the Chinese government said they have more than enough gasoline stockpiles because of the dramatic slowdown in their economy.  As a result, they won’t be importing any refined gasoline for the second month in a row.  This announcement comes on the heels of consistent United States demand destruction throughout the summer months.  Bad news for oil bulls.  It all comes at a time when oil exploration rigs are booked out for years to come and alternative energy sources like natural gas, nuclear power, wind, coal, etc... are about to be implemented in a major way by the next US President.

Investors have been searching for the perfect portfolio hedge but many have come up empty because of the already low valuations in the weak sectors of the market.  Housing seems like a great hedge against equity long positions but the sector has plateaued at the bottom for months.  Financials offer a similar story.  Everyone would love to own financial puts as downside protection but the sector is up over the last three months. 

Oil is your new hedge.  Its multi-year climb is over and investors can now count on this play to protect their portfolios over the next year.  When you gain conviction that the time has come to put cash back into the market, make sure you protect yourself with some oil puts.  Even when the market rallies, oil’s rise will be subdued and short lived because the global slowdown isn’t going away.

Disclosure: Author owns USO put options.