This Isn't the Time to Be Short Oil Prices
NEW YORK (TheStreet) -- If you're looking for a trade on oil prices, you have two choices. Being short oil isn't one of them, however.
President Obama and the British government have dropped hints about tapping strategic petroleum stockpiles. The Saudis are trying to reassure the market that they will step in and do what it takes to supply the world's oil needs. Even so, being long oil, or at the most bearish, on the sidelines with the trade, remain the only wise options for investors. The Middle East geopolitical risk premium will continue to trump short-term counterbalancing actions, as well as trump the longer-term risks about a global slowdown.
Crude oil prices dropped on Tuesday after Saudi Arabia said it is ready to meet any shortfalls -- perceived or real -- in global oil supplies.
Brent crude - the base for gasoline prices - fell 1% to under the $125 mark at midday Tuesday, while WTI crude fell almost 2% to $106. Oil prices had hit a three-week high before the Tuesday decline.Obama is scheduled to speak later this week at the Cushing, Okla., oil hub for WTI crude, and there is speculation that the government will tap the Strategic Petroleum Reserve (SPR), though the White House denies it. During an election year, Obama is in the least using the Cushing backdrop as a photo-op to highlight his administration's sound bite that that they have overseen the largest increase in U.S. oil production in 16 years. Even if the government were to tap the SPR, traders and energy analysts believe it would have a short-term, ultimately insignificant impact on prices. Dan Dicker, a contributor to TheStreet and its sister site RealMoney, said being flat or long crude oil is the only way to trade right now, and even if the Saudis are concerned about the current price of oil, their effort could be a drop in the bucket. Dicker said any further drop in oil prices in the coming days will be another opportunity to go long. Matt Smith, energy analyst at Summit Energy, which advises institutions on energy prices, said it sounds like Saudi Arabia is making a concerted effort to calm the market of any supply fears. "Saudi Arabia definitely has the ability to unwind some of the worry premium priced into markets through proactive measures (as we have seen today), but likely not the power to take us back the levels seen in December in the mid-$90s," Smith said, noting that Saudi Arabia is already producing at a 31-year high. How far down the Saudis would want crude oil prices to go for their own comfort level remains a wildcard -- $80 to $100 might be ideal for market stability -- however, Philip Silverman of trading firm Kingsview Capital is betting that the Saudis' impact is to be limited by the Iran-Israel issue for the foreseeable future.
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