Tuesday, January 7, 2014

Is Oil Ready To Drop?

One of the ways that KDK Fund makes money is through short term (less than 6 months) speculative options trading. For example, KDK Fund currently owns a UUP (US Dollar) $21.50 call with an expiration of January 24th. The most recent status of the trade can be found here. KDK Fund is regularly learning about other opportunities.

One such opportunity that is starting to gain favor with KDK Fund is the idea that oil prices are set to fall for 2014. There are a few items that KDK Fund has found to support this argument.

One major piece of the argument rests in the fact that the world is starting to produce a growing amount of oil. So much so that there are multiple reports now that the rate of growth is to outpace the growth of the refining ability and global GDP estimates. In the United States, oil growth is getting to a point where projections are that the US will be oil independent in the next 5-7 years. Mexico is looking to release land that was under government control to private oil companies for exploration research. This could nearly double output. When you add oil output from Iraq and other places in the Middle East on the market, the result should be pressure on the market price.

Another large item that supports this view is the expected rising value of the US Dollar. As the dollar increases in value, the price of oil should decrease accordingly. With the Federal Reserve decreasing their QE assistance, the value of the US Dollar should increase. This is part of the reason the current dollar trade is going on.

The USO ETF is nearing multi year support in the $32.00 region. A break of that could drop the ETF to $30.00 first and a continuation to as low as $25.00.

KDK Fund will be watching the ETF USO with eyes particularly on the put side of the options market. No trade is planned yet; just research. Any action taken will be reported.

**All posts on this blog are information and opinions only. They are not to be considered recommendations to buy or sell any security. Please do your due diligence first before trading and investing.** 

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