Friday, August 12, 2011

USO - Saudi's Got My Back

The only trade I consistently make money on is oil.

The gains outway the losses as there is a constant upward pressure on the price, this pressure comes in many forms -

1) Its a fundamentally dangerous business, every stage from extraction to transport, refining and distribution is dangerous, leading to short term supply disruptions and higher prices. A storm in the gulf of mexico increases the oil price, an attack on a Nigerian pipeline increases the price, routine maintenance on a Canadian pipeline can increase the price.

2) OPEC. Anyone can moan and whinge about the oil price, I don't, OPEC has my back. If the price falls too far too fast due to falling demand, OPEC will reduce supply creating artificial price pressure limiting my losses and creating a new buying opportunity.

I could go on with the reasoning, but lets get to the trade.

I usually use UK Warrants, such as RH22 Call Warrant On Brent Crude At 90

Right now I am not comfortable with the spread between Brent and WTI (West Texas Intermediate) and I see the premium at which Brent trade compressing. For this reason I am using USO to trade oil for now.

I initially took a position in USO at 34.28 intending to add if it continued to fall based on my conviction that even under a bout of selling pressure the upward bias remains.

From 34.28 the priced dropped as low as 30.48, I took advange of this to double my investment at the new price of 30.98. At this reduced price I actually bought more shares as I could afford more for the same investment amount.

The current price in pre market trade is 33.70 my break even price excluding costs is 32.56. I will be happy to exit the position at anything over 35 I would have been looking for a higher price originally, but given the size and speed of recent moves and the fact that I was able to successfully double down I am not going to be a hero on this one.

At the current pre market price profit ex costs is just shy of 400 USD, at 35 its 760.

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