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Thursday – Oil Failure Drags Down the Markets

Thursday, March 9, 2017 8:27
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Well that was kind of obvious.

As I noted for Reuters yesterday morning: “OPEC has unrealistic expectation as to what their production cuts can achieve, U.S. production over the next two years is expected to wipe out much of the OPEC cuts.”  Yesterday afternoon, despite the 5% sell-off in oil during the day, I told our Members to expect another 2.5% drop this morning and we hit our $48.75 target on the nose just after 6am on the /CL Futures:

That comment box is from our Live Member Chat Room yesterday afternoon and we also had our Live Trading Webinar at 1pm yesterday, where we had a good discussion about what’s going on in the commodities markets.  These are not hard calls to make because the oil market IS A SCAM!!!  If you keep that in mind and understand how the scam works – you can make lots of money trading it! 

This morning we decided Gasoline (/RB) has suffered enough at $1.62 though it may still go 1.25% lower ($1.60) before really turning up so our plan is to double down at $1.60 to average $1.61 into the weekend.  

Oil I’m less enthusiastic about going long on – there are massive long positions in oil that may have to unwind as more and more people are realizing OPEC’s cuts were too little and too late to salvage 2017.

Not only is the US simply bursting with excess oil in our inventories but, in an attempt to get rid of it (and fake demand), our manipulator friends have taken advantage of deregulation to EXPORT 500,000 barrels of oil per day (3.5Mb/week) more than they did last year.  Isn’t that insane?  We IMPORT 7Mbd but then export 1Mbd (total) or oil and another 1.8Mb/d of refined products.  That means the US is exporting 19.6Mb/week of oil, which is a full day of “use”.  

So, the fact of the matter is that the US does not consumer 19Mb/d of oil, we consume 14% less or 16.3Mb/d and that is why almost every single consumption statistic you see is wrong and that is OPEC and the Oil Industry’s dirty little secret – actual demand for oil is far lower than they lead you to believe and it’s heading lower every year as our cars and trucks and planes get more efficient.   

2016 was a terrible year for Gasoline demand but 2017 is starting out 6% WORSE already.  Why is that?  Well despite the low demand, all the market manipulation has driven the price of oil from $35.91 last March to $49.50 at the moment (up 38%) for no reason at all and gasoline prices are up from $1.84 to $2.34 (27%) which encourages people to buy even more fuel-efficient cars, which further lowers demand – even if people drive more miles.

The cumulative effect of this is astounding as 17.5M new cars were sold in the US and, since we have a fairly stagnant population of drivers, they are generally replacing older cars.  The average of the US fleet is just over 22Mpg but new cars are mandated to average 35Mpg so the average drive, who drives 15,000 miles a year was using 682 gallons of gas (16.2 barrels) and is now using just 428 gallons (10 barrels).  That’s a 38% reduction in gasoline consumption thanks to Obama’s CAFE standards.

Now, we multiply the 6.2 barrel/year savings times 17.5M cars and there’s 108M barrels of oil (2Mb/week) less that we need this year than last year and every single year we roll over another 17.5M gas-guzzlers, we knock off another 108Mb of demand.  In fact, by 2025, the US fleet is supposed to be averaging 54MPG and that, by itself, would mean we no longer have to depend on foreign oil imports to supply the US demand.  

Image result for world oil demand

That is why, of course, the Trump Administration is trying to stop it – because Russia and the Saudis won’t like it if we keep using less oil so the Trump Team is wrapping it all up in a flag and claiming Americans need the “FREEDOM” to guzzle as much gas as they want to – even if it has horrible consequences for the Environment, for the Economy and even for their own Wallets (and it increases our trade deficit and weakens the Dollar).  All those horrible things Obama did to us 

Trumps EPA pick, Scott Pruitt is expected to do Tillerson and his pals a solid and roll back the fuel standards but, fortunately, it’s an international market and it’s going to be hard for auto-makers to build special gas hogs just for the US market (though they’ll sell a lot more trucks, etc, that get lower mileage in order to maximize pollution and economic damage to please the Administration).  

Let’s remember, before Obama’s standards, gasoline prices were $4/gallon and spiking to $5, now they are $2 – if you buy 680 gallons a year then eliminating the cafe standards could cost you $1,360 per car more at the pump – yet another stealth tax that enriches the Top 1% (specifically our Secretary of State, in this case).  

“President Trump is waging a war on the environment, and he wants EPA Administrator Scott Pruitt to make our strong fuel economy emissions standards his latest victim,” Senator Ed Markey said during a Tuesday news conference. “Undoing the fuel efficiency standards would harm consumers, weaken our energy security and increase global warming pollution.”

So our long bet on gasoline is partly based on the idea that we have faith in Trump’s determination to destroy the Environment and the US Economy while enriching the greedy oil executives (like his Secretary of State) who helped destroy the economy 10 years ago with $140 oil prices.  It’s a solid premise because, as noted, his Secretary of State left his job as CEO of Exxon (XOM) to carry out this mission and his head of the EPA vows to dismantle the EPA and the funding for the EPA has been gutted in the new budget (money to keep the Great Lakes clean has been cut 97%, for example).  

Politics is no different than any other investing decision, you see a series of events that lead to a market movement and you try to get ahead of the game.

Sunoco (SUN) is a refiner we like and they’ve sold off sharply with gasoline. They pay a very fat 13.5% dividend ($3.30) and you can buy the stock for $23.71 and sell Sept $22.50 calls for $2.50 and $22.50 puts for $2.30 and that nets you in for $18.91, which makes the $3.30 dividend 17.5% while you wait to see if you get called away at $22.50 for another $3.59 gain (19%) so this trade can throw off tremendous amounts of cash in short order.  

If SUN goes lower then you would have to buy another round of shares at $22.50 to average $20.70, which is 12.6% less than the stock costs now and THEN you can sell more puts and calls to further reduce the basis.  Now we just have to root for Team Trump to destroy our children’s futures so we can make a few bucks in the present!  

Have a great day!  


Provided courtesy of Phil’s Stock World.

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