Don’t Fret Over Europe’s Debt Crisis; Oil Prices Will Bounce Back (USO, OIL, DBO, UCO, SCO, OIH, DIG, DUG, ERX, ERY)
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Kent Moors: The volatility in the oil market has notched up this week, courtesy of another bout with debt jitters in Europe. Oil and gasoline futures are moving down – and most of the energy sector along with them.
In a situation like the current European debt mess – where maximum uncertainty is channeled into a very focused concern – oil futures will generally overcompensate, exaggerating the downside.
Of course, that is of little consolation to the traders who in the past few days have seen about $3.00 cut from the near-month futures (July).
What the Market is Saying
We are just into the next month of options (this one-month cycle ends June 18), and the prevailing trend in calls remains up. That is, the preponderance of plays on the call side (buying options) are in a range betting on a price of between $27 and $31 for the iPath S&P GSCI Crude Oil Total Return Index ETN (NYSE:OIL).
(For some context, that exchange-traded note (ETN) closed yesterday (Tuesday) at $25.91, an increase of 56 cents – or 2.21% – per share.)
This ETN is the most direct way for average investors to participate in crude oil futures, with options on OIL the least-risky way of insuring against high volatility.
It is not anything intrinsic in oil supply and demand that is prompting this volatility.
This one is all about what the renewed concerns over Greek and Italian debt are doing to perceptions of European oil demand and the exchange rate between U.S. dollars and European euros. In fact, the dollar is improving against the euro – another sign that the debt problem is pressuring forex.
With NYMEX West Texas Intermediate (WTI) crude prices down further than Brent crude prices, one might wonder how a European debt problem could be having a greater impact in New York than it is in London.
The spread between WTI and Brent has been a lingering concern for almost a year. At current prices, that spread has intensified from an average of about 13% of the WTI price over the past 10 trading sessions to almost 16%.
This tells us two things:
First, it tells us that the primary impact of European debt has been working into Brent pricing right along, augmenting the downward volatility that was already being experienced in the market during the last week.
And second, this tells us that the pressure ends when the debt crisis abates. This is not oil-market-induced pressure. It is exogenous to the market.
Stay the Course
And this is what the OIL options are telling us.
Despite the protracted concern and distraught remarks from the tube’s talking heads, the debt situation will resolve. If it does not, the entire Eurozone is in peril. And despite the angst that possibility prompts, the likelihood of that is remote.
It’s simply not going to happen. So stay the course, folks.
Related Tickers: United States Oil ETF (NYSE:USO), iPath S&P GSCI Crude Oil (NYSE:OIL), PowerShares DB Oil (NYSE:DBO), ProShares Ultra DJ-UBS Crude (NYSE:UCO), ProShares UltraShort DJ-UBS (NYSE:SCO), Oil Services HOLDRs (NYSE:OIH), ProShares Ultra Oil & Gas ETF (NYSE:DIG), ProShares UltraShort Oil & Gas ETF (NYSE:DUG), Direxion Daily Energy Bull 3X Shares (NYSE:ERX), Direxion Daily Energy Bear 3X Shares (NYSE:ERY).
Written By Kent Moors, Ph.D. From Money Morning
Dr. Kent F. Moors is an internationally recognized expert in global risk management, oil/natural gas policy and finance, cross-border capital flows, emerging market economic and fiscal development, political, financial and market risk assessment. He is the executive managing partner of Risk Management Associates International LLP (RMAI), a full-service, global-management-consulting and executive training firm. Moors has been an advisor to the highest levels of the U.S., Russian, Kazakh, Bahamian, Iraqi and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 25 countries and has appeared more than 1,400 times as a featured radio-and-television commentator in North America, Europe and Russia, appearing on ABC, BBC, Bloomberg TV, CBS, CNN, NBC, Russian RTV and regularly on Fox Business Network.
Moors is a contributing editor to the two current leading post-Soviet oil and natural gas publications (Russian Petroleum Investorand Caspian Investor), monthly digests in Middle Eastern and Eurasian market developments, as well as six previous analytical series targeting post-Soviet and emerging markets. He also directs WorldTrade Executive’s Russian and Caspian Basin Special Projects Division. The effort brings together specialists from North America, Europe, the former Soviet Union and Central Asia in an integrated electronic network allowing rapid response to global energy and financial developments.
Russ, that whole Liberty and Freedom to participate in personal commerce unhindered by the Govt’s “market” superstitions du jour, that is what REAL AMERICANS believe in, not shallow minded and petty dictates that this price or that price must be low, all the while working in exact adverse of its own superficial propaganda.
Let me make my perspective really simple – ANYBODY can profit or LOSE on oil in todays world, even little ol me. Second, I will maintain my faith and stock holdings in the market for much longer than I will maintain my faith and stock in this, or nearly any other Govt.
You Dont like the price of oil, use less of it and take your savings and go buy EE Bonds and leave everybody else with a sound system of personal Liberty to buy and sell whatever they want at whatever prices, be they at profit or loss, as they see fit.
Dont be an emotions driven NeoFascist.
Hey Matt. I do understand the bigger picture. Just because I didn’t address the government side doesn’t mean I don’t also take this into consideration. Yes, we need more permits, drilling, etc. This administration is responsible, too. I am just saying that the SINGLE commodity that is the lifeblood of this country is oil. It should not be a profit center for a select few that makes the rest of the population suffer. Oil is NOT based on supply and demand. It changes on a daily basis due to irrational beliefs (that also change with the wind) of what these traitors believe MIGHT happen on Wall Street. If some dictator farts in some OPEC country, the price at the pump rises 10 cents a gallon immediately. It rarely follows logic. It always amazes me that there are people out there who WANT oil to stay high. It is just a natural assumption that all of us want to see the price at the pump to come down. Real Americans feel this way, anyway.
@Russ
pipe down Russ. Maybe, Just Maybe, if the real people in charge would allow pipelines to be built, allowed permits to be issued, opened up nearly every square mile available for drilling that has ALL been shut out, THEN prices would not be so volatile. Im no big trader in any way shape or form, just a working stiff who puts a few hundred here and there into E-trade, but you need to better understand the broader picture.
Economics is the allocation of scarce resources, very simple, the more scarce relative to demand, the higher the price.
omg. Sell!!!!! Sell!!! You people are ruining our lives. Quit trying to make a profit off of the back of America! You aren’t traders, your traitors. You need to bring the price of gas back down to where it needs to be, not up to where you want it to be. This is awful. Your business is awful.