MEP Portfolio Alert 6/29/26

buy XOM @137 - 20% ; buy CLV6 $75C/Sell CLV6 $85C @$1.80 - 3.5%

I could write all day about the first trade we're going to make - but let's keep it simple, stupid:

Oil is too cheap. So we're buying an oil stock.

We're also buying some oil futures option spreads - but back to that in a minute.

The 'secret' if there is one in the current oil market is to figure out where the Strait of Hormuz is going to be in two months. The market says everything going to be hunky-dory, all back to normal, 15m barrels flowing smoothly through daily. I don't think so.

Fact: global stockpiles are at historically desperate levels. Fact: Even in the most optimistic markets, I've seen analysis that would put oil at $87 a barrel for stockpiles this low - at an average. Fact: traders were incredibly long oil, never expecting the 'deal' that gave Iran everything. Fact: They're incredibly short now - insanely so. FACT: The Iranians are mean, savvy negotiators. They've done this through 5 administrations and every advantage comes from making trouble for a final 'deal' that truly opens up supply. That's why every Sunday, you see a report that the 'truce' is back on, and every Thursday a random Iranian drone hits a tanker.

The leftover oil that was 'backed up' in the Strait, waiting for weeks, has reached refiners - a temporary glut. Refining had slowed, so now we have cracks (the relationship of the price of gas and diesel to oil) that is blown out to spectacular levels - In other words, oil is underpriced, while gasoline is overpriced (at least relative to oil). That's why you still see gas at the pumps at $3.75, while oil is $70. That's temporary - the refiners will take care of that.

It all leads to one trade - buy oil. Buy it as a risk down to maybe $65 and a reward of nearly $90.

What's the case against this? I don't discount the other hatches to escaping oil in the Gulf. Other pipelines, trucks, etc. But it's never going to make up for the flow of supertankers. Then, there's Trump and to a lesser extent, China. Trump will do anything at all to keep gas low through the midterms. He's got what's left of the SPR, his Justice Department, his ability to promise US money to the Iranians, the UAE, the Pakistanis - anyone who'll keep the oil flowing. He'll use it all. It'll intimidate the traders away from buying. It has already.

The question then becomes whether Trump can suspend the physics of markets through November. I don't think anyone can - I can feel already how tightly wound the oil markets are. Literally, I feel it. It's like a rubber band that only needs a slip somewhere to catapult in the other direction - fast. I've not been buying as oil came down from $110, or $90, or $80. We're here, under $70. Where it was before the war started.

I thought of buying something with a higher beta, more correlated directly to oil prices, something like Apache or SM energy or Matador. But why? I don't like them. I like Exxon. So, let's buy Exxon for the long push and directly buy some oil through futures for the "rubber band" play, ok?

About those call spreads. They're a time play. They're designed to erode to zero. They expire in mid-September. I'm not saying we'll let them erode to zero, just that is their design. Limited risk and limited reward. You put these on to either triple your money or lose it all. That's the mindset you need to bring, for those of you who've never played futures, and certainly not futures options before. Bigger risk, faster and bigger payoff. And to be fair, they don't pay off often, which is why this is a very small investment. But I couldn't resist it. You can play them in full futures (CLV6) or in micro form (MCLV6) as per your portfolio. If you don't feel comfortable with them, just don't. You'll still have the oil stock and it's dividend and all that other good stuff.

dan@dandicker.com