Oil's Surge Today

Taking action to protect profits on our USO options trade...

Editor’s Note: I’m going to keep this alert on the short side, because I covered oil at some length in my post earlier this week “Oil: The Imaginary Glut.”

In that issue, released on Monday January 6^th, I recommended my first options trade for the new Free Markets Speculator Options Trader portfolio that’s part of the paid tier of this service.

That trade was a bullish position in calls on the US Oil Fund (NYSE: USO), which are now showing a significant profit. I’m recommending readers take action today to book some of those gains and adjust out exposure to reduce risk. Please scroll down to the “Actions to Take” section below for details.

For those interested, I’m still offering 30-day free trials to the paid tier of this service via this link:

-- EG

Oil prices are up 4%+ this morning based on a handful of news items.

First, extreme cold weather across parts of the US, as well as the European Union (EU), this month is driving up demand for heating oil and key natural gas liquids (NGLs) like propane. So, that’s a meaningful boost to the demand side of the equation.

In addition, extreme cold in parts of Texas and Oklahoma will at least temporarily interrupt production. Last year’s short-lived January cold snap hit output to the tune of around 500,000 bbl/day and it’s quite possible this year’s more prolonged cold weather will have a larger effect. That further tightens the US oil supply/demand balance in Q1 2025 with US oil inventories already looking tight.

Second, the Biden Administration has imposed sanctions on a large number of tankers carrying Russian crude oil. China and India have been taking advantage of discounted Russian crude oil since the Ukraine invasion in 2022; this move is forcing these nations to look elsewhere for supply, replacing Russian barrels with barrels from OPEC, African producers or elsewhere.

Third, California fires are likely to disrupt operations of the state’s refineries, as well as supplies of oil and refined products transported by pipeline through impacted portions of the state.

Finally, Chinese government bond yields have plunged early this year, a sign of growing concern surrounding economic growth and the potential for outright deflation in the world’s second-largest economy. The Chinese government has introduced multiple stimulus measures since last September, resulting in short-term pops higher in Chinese stocks.

However, urgency and concern about the economy appears to be growing, and there’s a growing sense in markets that stimulus remains inadequate. So, I suspect China will announce additional measures in coming weeks, perhaps timed around the Chinese New Year at the end of this month.

Weak Chinese economic growth was arguably the biggest headwind for oil prices in 2024 and stimulus could well lead to a rebound.

More broadly, even before potential production disruption due to cold this month, US oil production has been essentially flat over the past 12 to 18 months. When you add that ongoing shale supply issue to the factors I just outlined, the outlook for a significant glut of oil on the global market, envisioned by groups like the International Energy Agency (IEA), through the first half of 2025 looks increasingly implausible.

With these points in mind, I’m acting on the trade in the US Oil Fund (NYSE: USO) recommended early this week: