With Gaddafi Gone, What Is The Outlook For Brent Oil?
- Posted by TheArmoTrader
- on October 20th, 2011
The major news of today was that the 40+ year leader of Libya, Muammar Gaddafi (if that is how you spell it) had been killed. The implications of this major conflict in Libya had been a bullish factor for Brent Oil. With Libya productions halted and/or slowed because of the conflict, the world lost access to 2% of the worlds oil production. 2% might not sound like much, but when you take into account that Brent oil (which has major effects on gas prices) is about 37% of the worlds yearly oil consumption, that puts a greater importance to Libyan oil (which would put it at 5.5% of Brent production). Now obviously there are more issues that need to be resolved, but lets just assume that Libyan oil production is headed towards the better.
While I believe that Gaddafi’s departure has already been priced in for the short term, there can be a possible play on the future price of Brent.
The Chart & Trade
Brent Oil (Futures) – Daily Chart
As you see below, Brent Oil has been in a very nice down trending channel ever since it double topped in the 1st quarter of this year. It has put in lower highs and lower lows. This bodes well for a longer term short. The trade would be to short at the top of the channel with a reasonable stop above just in case it breaks. However, there is a big caveat here. Earlier this month, instead of hitting a new low in the channel, Brent oil put in a possible double bottom at around $99.00-$100 range. While I still like the short, near the top of the channel (that would be around $112), it is important to realize that the double bottom (or arguably the inverse head and shoulders) can act as major support and a bullish technical outlook for Brent.
The only way to play this trade (if you do not have access to brent futures) would be the short the Brent Oil ETF, $BNO.
A way to hedge this trade would be to go long WTI Crude oil ($CL_F). If oil in general is sold off, I would expect brent to get hit harder, thus increasing your alpha. If oil in general is bid up, then you are hedged with WTI (where I would be looking to go long as close to 80 as possible). The only scenario where I see this pairs trade hurting you on both sides is if the crack spread continues to rise. But sitting at 165% above 5 year average, I doubt we see much of a bigger rise.
$CL_F – WTI Crude Oil
5 year Crack Spread Chart
It is important to watch RBOB Gasoline as well, as this will come down in price if the crack spread narrows and/or both types of oils sell off. As you will see below, Gasoline is also in a similar down trending channel.
$RB_F – Gasoline Daily chart
Note: I am not an oil expert. This is just an idea that I am throwing out there that I may or may not take and that may or may not have any logical reasoning to them. Do your own Due Diligence.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Jerry "TheArmoTrader" Khachoyan is currently an active trader, investor, market commentator, and Finance-Twitter participant. He started being involved with financial markets in September of 2008. He concentrates on using technical analysis and an understanding of macro to determine his trades and investments. He graduated UCLA with a degree in Political Science in 2013. The stock market to him is one of the greatest inventions by man.
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