With Gaddafi Gone, What Is The Outlook For Brent Oil?

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. 

Tags: $CL_F, $USO, $BNO, $RB_F, $UGA, $OIL

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.

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