Smash the Rally in Oil

I love it. First, Israel's right-wing prime minister, Benjamin Netanyahu, calls for a snap election. Many observers are viewing this as a referendum on war with Iran. Then, terrorists blow up the Iran-Turkey pipeline, a major 1-million-barrel-a-day supplier to Europe. Next, we learn that U.S. troops have been dispatched to our ally, Jordan, to prevent the Syrian civil war from spilling over there. Is this a prelude to an American invasion?

It was all enough to prompt a nearly $7 rally in west Texas intermediate oil in recent days. My response to all of this? SELL! That's why I bought the United States Oil Fund (USO) December $32.50-$35 bear put spread at $1.03 this morning.

Related Article: Full Steam Ahead for Suezmax Tankers, Thanks to Iran Sanctions

Ben Bernanke has committed to buying $40 billion-a-month of mortgage-backed securities as part of QE3, he has not promised to buy a single barrel of oil. This is bad for oil.

That means Texas Tea has to take the full brunt of collapsing demand caused by economies in Europe, China, and Japan that are in free-fall. There are no bailouts here. On top of that, Saudi Arabia wants to whip some discipline into its fellow OPEC members.

It does this by permitting its own production to surge, dropping prices, and inflicting pain on recalcitrant cartel members, especially Iran. Around $80 a barrel is thought to be a price they would be happy with, some $14 a barrel lower than today's price.

The failure of oil to pierce the 50-day moving average to the upside on the charts is thought to be particularly significant, reversing an uptrend that has been in place all week.

Related Article: Want Cheap Oil? Look no Further than Canada

On top of all this is the never ending threat of a Strategic Petroleum Release by the administration that would cause prices to immediately gap down. It is safe to say that energy is not Obama's favorite industry. He is essentially sailing "Buy those $100 calls on oil at your peril, because I will render them worthless." That is what he did will his jawboning campaign in the spring when crude threatened $107. Substantially tougher margin trading requirements for many commodities by the main exchanges quickly followed.

The final argument is that in the wake of QE3, there is a sudden death of "RISK OFF" positions to trade against. Oil is almost one of the only ones out there. So an oil short will partially hedge out downside risk in the substantial "RISK ON" positions we have built up in (GLD), (AAPL), (SLV) and (GOOG).

The extra turbocharger on this trade is that the hedge fund community is still hugely long oil, betting on an attack on Iran by Israel that never came. As we move into yearend, the pressure on them to dump their losers will be overwhelming.

My friends in Israeli intelligence told me just yesterday that their country would take no military action until next summer at the earliest, preferring to wait and see if U.S.-led economic sanctions against Iran work or not. Far-and-away the best thing for Israel to do here is nothing. That means you want to short every geopolitical event coming out of the Middle East for the foreseeable future by selling oil.