That Steep Decline
of Oil Market Price Was Caused by Economic Decisions, Consequence of the War That Followed.
On July 11th at the close Oil was
worth $76.35. On July 14th two days after the attack from Hezbollah
oil price peaked at $80.64, its all time high.
Today West Texas Intermediate for
march delivery is worth $56.88 after $51.03.
The price of oil has lost 33% in 6 months.
That Brisk Decline of Oil Price Is The Economic Consequence of the War.
I have shown that the oil price decline was linked to short-term interest rates, more precisely the determinant is the difference between short-term and long-term interest rates on the US$: FFY-TYXY.
The Vicious Cycle of Oil
Price Inflation: higher spread FFY-TYXY, which brought higher oil (&
minerals) price,
which increased the spread of FFY-TYXY through higher inflation and higher level
of profit recycling
by mineral producers (Greenspan Conundrum)...
Was broken and replaced by The
Virtuous Cycle of Declining Oil Market Price: lower spread FFY-TYXY,
which brings lower oil (& minerals) price, which decrease the spread of
FFY-TYXY through
lower inflation and lower level of profit recycling by mineral extractors...
On August 8, 2006 the FOMC Decided,
Because of the Possible Adverse Effect of the War
on Demand to Stop Increasing Its Target for Feds Fund Rates After Having Increased Them
17 Times by
Increments of 0.25% Without a Single Interruption: Read the Press
Release.
The Hezbollah aggression has had the unintended consequence of breaking down the spiralling oil price inflation.
On January 31st the FOMC will
meet and decide, probably, to lower the short-term rates on the Dollar.
Should they decide even for a
small cut of 0.250% or 25 BPS,
it would bring down FFY-TYXY down from 0.370% to
0.120%,
And accelerate significantly the rate of decline of oil price.
Should they decide to do nothing the same downward
trend would stay in place,
even accelerated by a probable increase of the long-term rates and hence, a
decrease of FFY-TYXY
whose decline has already recently been reinforced, as we can see it on the daily
chart.
That would still leave the Israeli rates 0.50% below their American counterparts.
Moreover the February output
limitation of OPEC and the announcement of the increase of the size of the
Strategic US Oil Reserve has caused a temporary divergence between oil and other
minerals.
That temporary divergence will be resolved, I expect, in favour of the
minerals.
I, hence, propose to play the decline of
oil price just before the release of the Crude Inventories in the US which will take place Wednesday January
31st, 2,007 @ 10:30 EST and before, for the courageous, or, for those who prefer
to
play it safe, after the FOMC policy statement which will take place Wednesday January
31st, 2,007 @ 14:15 EST.
Profit From the Oil Decline
Sum Invested: ₪25,000
Representative Rate on January 30, 2,007: 4.2510
25.000 / 4.226 = $5,880.96
Expected Returns:
|
W/O Con-UN-Drum |
With Con-UN-Drum |
|
| Strike $37 |
$232,760.00 |
$1,242,000.00 |
| Strike $30 |
$0.00 |
$9,315,000.00 |
Once a week till July 1, 2007, I will update to Our Discussion Groups an optimal entry point, of those simple strategies: the Texas Spread and the Israel Great Variation. They are meant to optimize the profit you may derive from the decline of oil price.
Its timing and strike this week will depend on the rebound of oil price caused by the chilling effect of the "OPEC-FOMC meeting" and the expectation of the February OPEC production cut.
Remember: what is in the paper is already factored in the Market.
We will probably buy out of the money puts or put warrants on Brut Oil (West Texas Intermediate) whose term will probably be August 2007 (We can't afford a longer term because on the long run... and being rich can't help a dead man.)
Transaction Costs:
$7 per option (!!!A big banking institution in Israel!) Shop, you can get better than $2.
Timing:
We want to trade before the Crude Inventories on January 31 at 10:30 EST and before the FOMC policy statement at 14:15 EST.
Our Probable Intervention Time Wednesday January 31, 2007 After 10:30 EST and Before 14:15 EST
CLQ07 - CLH07: $3.17
Recent High CLH07 $62.55 on 29-12-2,006
Recent Low CLH07 $51.03 on 17-01-2,007
Difference: $11.42
Objective 50% Retracement: 51.03 + 5.71 + 3.17 = $59.91
Very Recent High CLH07 $55.45 on 24-07-2,007
Very Recent Low CLH07 $54.10 on 25-07-2,007
Difference: $1.35
Objective Symmetry 100%: 55.45 + 1.35 + 3.14 = 56.80 + 3.14 = $59.94
We Will Probably Chose to Intervene @ Market Price $59.89 for CLQ07 or $56.69 on CLH07.
Our Objective Having Being Reached on January 30, 2007 at the close we wouldn't advise to wait anymore to intervene. Except of course if we were to trade markedly above $57 tomorrow morning. In that case you would find an update There.
Last Price CLH07: $56.83
Expiration Date: July 17, 2,007.
Days Till Expiration: 167
Volatility: 36.90%
I expect that volatility will go down as oil price goes up.
Risk Free Rate Over the Period: 5.15%
The valuation of the options have been made with Derivatives ONE.
Texas Spread
פישוק טקסס
Volatility: 36.90%
I expect that volatility will go down as oil price goes up.
Option Price: $0.11919 or $0.12 [cut-off future price for execution at 0.01: $56.85]
Number of Options Acquired: $5,915.76 /( 0.12 * 1,000 + $7) = 46.58 = 46
Without the Con-UN-Drum:
Present Rate of Decline: $5/30 days
Expected Price of Oil: $31.94
Expected Return: 5.06 x 46 x 1,000 = $232,760.00
Rate of Return: 3,834%
With the
Con-UN-Drum: