It looks like trouble is brewing again in the Middle East…
It seems as if the United States will bomb Syria and kill people because the government in Syria is killing people in a way that we don’t like.
The argument is that Syria has used weapons of mass destruction — sorry, chemical weapons — against civilians and needs to be punished.
This is a bit like trying to break up a fight between a pimp beating his girl in a bar parking lot at closing time. The smart move is to keep on walking.
But Obama won’t do that. He drew his line in the sand, and the U.S. Navy has his back.
There will be a few Tomahawk missiles sent into empty palaces, which will have as much effect as when the U.S. destroyed the Sudanese aspirin factory in 1998.
Global politics aside, here at Energy and Capital, it is our goal to profit on global events when they cause volatility in the oil markets. The typical way to play this scenario is to buy the rumor and sell the news.
As I write this, WTI is trading at $110, and Brent crude is trading at $116 — and moving higher. At this point, you are too late to buy the rumor and would be better off selling the news, as I’ll explain below.
First, a little background…
The Deal with Oil
We have been living with high oil and gas prices for a few years now. So long, in fact, that we forget that it used to be much cheaper.
If you take the long-term view from when John D. Rockefeller formed the Standard Oil Company in 1869, U.S. crude oil prices adjusted for inflation averaged $23.67 per barrel in 2010 dollars. World prices averaged $24.58 a barrel.
That is a low cost for energy, and there have been many papers written that propose the economic miracle of the 1900s was based primarily on cheap fuel.
The price of oil started to rise after 1970 for a number of reasons, including OPEC, inflation, and the end of the gold standard.
If you use post-1970 data, U.S. crude oil averaged $34.77 per barrel, and Brent averaged $37.93 per barrel.
Prices in the $30 range seem low by today’s standards… but I remember filling up my first car, a 1968 Cadillac Coup De Ville, with $20, and it wasn’t that long ago.
Heck, when Obama took office, the price was $35.00 per barrel.
My point is that we are at the top of the range and not the bottom.
Regression to the mean would mean much lower prices.
But back to the point of making money…
War Spikes – Selling the News
History tells us that you want to dump oil when the action starts.
In June of 1990, oil was trading for $29.44. At this time, Iraq started making war threats against Kuwait for stealing its oil.
Iraq invaded Kuwait on August 2nd.
In October of 1990, the United States was threatening to invade Iraq.
Oil doubled to $60.99.
By the time the U.S. started dropping bombs on January 16, 1991, the price of oil was falling again… and by March of that year, oil was back to $33 a barrel — despite the fact that 600 Iraqi oil wells were on fire.
The same thing happened in the second Iraq War: The oil price jumped from $33 to $44 and sold off with the invasion as well. The oil price was back to $34 within two months.
All of this would suggest that the time to sell is right before the bombing takes place.
If you believe past is prologue, then a good way to play it is to buy puts on oil.
If you don’t like options, buy the PowerShares DB Crude Oil Double Short ETN (NYSE: DTO).
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
