An investor’s guide to the Middle East
By James Anderson March 9, 2011
Hartford, Conn. (MarketWatch) —
I’ve finally had enough time to catch up on the latest disasters in the Middle East. Here are some insights to give investors perspective
With all this “bullish” oil news it should be obvious that being long oil is the simple way to sleep at night. Futures traders sure believe that. Look at the number of speculators long the April crude oil contract. In my opinion, if it’s that obvious, it’s obviously wrong.
Here’s the reason why. In addition to a Gadhafi event, an ETF, United States Oil /quotes/comstock/13*!uso/quotes/nls/uso (USO 42.39
, +0.34, +0.81%) , is now the 800-pound gorilla in the room. USO is supposed to track the daily price of crude oil. At first glance, that seems relatively harmless, but the reality is that USO, as of March 4, had about 19,000 oil future contracts that expire in late March. USO has to sell all 19,000 contracts. The USO portfolio managers will start this week. Read Minyanville’s “Oil Spikes Have Always Led to Stock, Commodity Bear Markets.”
Unlike stock futures and other casino-like futures, crude oil futures trade as a real commodity, meaning that you can take physical delivery of the actual commodity.
The place that physical delivery of a West Texas Intermediate futures contact takes place is Cushing, Okla. It has to happen somewhere, and this place is a lot easier than downtown Chicago or New York. Cushing was selected because it was at the intersection of several crude oil pipelines.
To fully understand the importance of Cushing, let’s assume that the futures price of oil was higher than the current price. A smart buyer could buy oil at this month’s price, sell a futures contract to lock in next month’s higher price, and store the oil for month. The only problem was where to store it for a month. Surprise, surprise, the market sensed a need, and huge storage tanks were built in Cushing.
The reality of this USO rollover to the next futures contract is that there is almost no additional storage capacity left at Cushing. Therefore, the normal arbitrage buyers of USO‘s forced contract sales have no place to put the oil. Conventional arbitrage doesn’t look like it will perform normally on this USO rollover. Read Minyanville’s “Crude Oil: There Are No Good Outcomes.”
My thinking is that a downside surprise is more likely than upside in the next couple of weeks. I’m keeping buying power available for my favorite domestic oil play, Continental Resources Inc. /quotes/comstock/13*!clr/quotes/nls/clr (CLR 64.66
, -1.64, -2.47%) , in case the downside surprise does develop.
James Anderson is a Minyanville