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.

"I do think it's still up," Silverman said. "Some people say the heightened tension in the Middle East is already priced in but I don't believe it. If an attack happened, we would see a tremendous spike in oil instantaneously. I was reading a speech Israeli prime minister Benjamin Netanyahu gave a few days ago and I was surprised. It seemed like he was preparing everyone in Israel for an attack on Iran and came across as if this will happen soon regardless of what world leaders say."

Silverman said being flat oil is as bearish as any investor should get now, and in fact, he is currently on the sidelines waiting for a drop in WTI to $100 before getting long again.

"Going against oil doesn't make sense here, but it feels to me like no man's land," he said.

Smith said the Saudis are indicating they will take further steps to keep prices in check through ramping up to 12.5 million barrels per day if need be and the headline-grabbing action of sending increasing cargoes to the U.S. is a signal of their intent; it's also a signal of their discomfort with prices where they currently are. However, he also noted Saudi minister of petroleum Ali al-Naimi's statement that markets are already oversupplied by 1.5-2 mbpd highlight this frustration.

"I think the fact that Saudi ramped up production to a 31-year high as prices rallied earlier this year indicates it is concerned about current price levels, let alone any further run-up from here," Smith added.

This doesn't mean the Saudis can wipe out the current geopolitical risk premium, though.

Silverman said a slowing in the global economy triggered by a marked slowdown in China would have more power to take the upside out of oil than Saudi Arabia can do by offsetting the geopolitical risk.

That's something to watch for in the months to come, however, at the moment, his finger is closer to the "buy" button on oil as he watches events in the Middle East more closely and expects the risk premium in the price of oil to have another leg up.

-- Written by Eric Rosenbaum from New York.

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