Diary Of Trading Oil

by: David Butler


The meeting of major oil producers in Qatar this weekend failed to give us the good news we were hoping for in oil futures.

Luckily, we had enough background on the situation to know last week that there probably wouldn't be much in the way of progress at this meeting.

While news of the meeting initially pressed down pricing, Kuwait's labor strike seems to have provided the catalyst for holding things up.

Despite Kuwait's sudden loss of 60% of production, factors like Saudi Arabia and Iran's looming production re-entering the world market are likely to supersede Kuwait and drives prices down further.

A new move in oil

In trend with most, I'm big on oil right now. I've written previously about trading the United States Oil Fund (NYSEARCA:USO) on headlines related to the Fed's moves on interest rates. The moves in the US dollar had an impact on oil prices and it was a nice little spot to make a move. This weekend has provided a lot of momentum (up and down) for oil price moves. The Doha meeting for OPEC members basically accomplished nothing. It was sort of a stupid waste of time. It also has everyone speculating. Oil opened this morning back down in the $30's. It has since rallied to a degree, due in large part to the ongoing turmoil in Kuwait.

A month ago I bought into USO around $9.60. I stupidly jumped out in the $10.20's and chased it in the $10.30's (never the best idea). With the literature last week seeming to imply that nothing would come out of the meeting in Qatar, I sold out at $10.58 and waited. Sure enough, the news hit about Iran and Saudi Arabia etc. and the ETF opened at $9.82 this morning. We're already back up in the $10.15 range but I'm not buying today. There's too much happening.

On the one hand, we have this failure by oil producers to coax Saudi Arabia into a clearer plan for future production. I have my doubts that they ever went to that meeting with the intention of making any clear agreements on curtailing output. This is all about market share. This "turf war" is one of the largest geopolitical games of our lifetime. Too much has been given up in driving prices down. The Middle East wants market share. They also want low prices to make alternative energy become much less attractive to consumers. Without major US defaults, Saudi Arabia hasn't gained anything from this massive crunch in margins. If they can cover their costs at $38 a barrel, I really don't see them allowing too much to happen until we start seeing bankruptcies here in the states.

On the other hand, we have Kuwait's labor strike. In what can only be described as "perfect timing", this labor strike has taken down production by 60%. Even more interesting is that the 1.7 million barrels now missing from production are very close to the world surplus that's hampering pricing. This seems to be what held up prices today, which is why I'm not buying back in yet. Seeing as how there's no way to know how long that strike will last, it opens up even more uncertainty. You're going to have speculators factoring even more into their price guessing and oil could be even more volatile. You have some analysts saying $30 a barrel.

While I might not get that bearish, I am looking for a new buy-in around $35-37. These two opposing forces are pulling the price in different directions. The failed Qatar meeting will undoubtedly take pricing down, but the longevity of this Kuwait labor strike is holding that back at least for today. The big thing that the news is talking less about are the lower tier producers (that are still very relevant) like Nigeria and Venezuela. These oil producers have been brutally wrecked by the fallout in pricing. Possible defaults/economic factors in these countries, as well as possible US firm defaults, are likely to be the big catalyst for an upward price shift assuming that Saudi Arabia stays on its current path.

There are some nice returns available in oil if you keep your eyes on how this plays out. I'll most likely buy USO again; I stay away from the leveraged funds as I've dealt with the painful decay of those in the past, and don't want to deal with it again. I encourage comments and anyone's thoughts about the situation as I am always looking to add to my point of view on the matter.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in USO over the next 72 hours.

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.