Oil: You Think the Pipes Improved With Age?

Dan Dicker

— 3 min read
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Oil: You Think the Pipes Improved With Age?

When I started Matrix Energy Partners back in late June, one trade came to the fore almost immediately: the need to own crude oil, one way or another — whether the barrel itself or with oil stocks that stand in as its proxy. We did both.

It was about as obvious a setup as I've seen in a long time, and rarely one represented this strongly. Global stockpiles sitting low. Traders massively short. And the Iranians "holding all the cards" — with no incentive whatsoever to open the Strait of Hormuz, and every incentive to keep it at least marginally blocked, and the threat to close it completely with a drone or two always alive. It was just ripe for a rip higher.

I don't claim any genius in spotting this. Nearly every decent oil analyst — including my favorite, Jeff Currie — was banging the same table about the opportunity this setup offered. (See the video above.) We put the trade on, and it didn't take long to show spectacular results. We've since taken partial profit on it. I'm a big believer in the maxim that nobody ever went broke taking a profit.

You could set your watch by what came next. Trump goes back to his regularly scheduled programming: promises of a better, refined deal to open the Strait, sprinkled with threats of civilizational annihilation. Say what you want about him, but the markets can't take either of those threats lightly — and Trump knows it. Watch the algorithmic moves in oil over the last two sessions and you can see it: he's going with Column A as expected, not Column B.

So what now?

I feel like the current oil market is like Tom Hanks standing in front of his plumbing contractor in The Money Pit. The contractor wants a $5,000 retainer to fix the pipes in his dilapidated house. Hanks protests — "What, you don't want to even see the pipes?" And the contractor says, "I was here five years ago. You think they've improved with age?"

So it is with global oil stockpiles and the Strait of Hormuz. Neither has improved in the last six weeks and neither look like they are getting better any time soon. Which means the respite you've seen over the last two sessions isn't a new trend to the downside — it's a marker that prices may have moved too fast, too soon. That the traders panicked out of a lot of their shorts. That this is a technical move, while the fundamentals haven't changed one iota. If anything, they've gotten worse. In my opinion, this isn't the end of oil's upside - it's just a break.

We have other positions on at Matrix, of course. None of which I like quite as much as the one we're playing in oil, obviously — but all of which I expect to do just as well over time, the way oil has. And most of the others are sitting right now not far above, or even below, where we first put them on.

Which makes this — even setting aside the profits we've already booked in the oil trade — an awfully good time to take a look at becoming a subscriber at Matrix Energy Partners.

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dan@dandicker.com

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