Egypt is the big topic on oil trader’s minds this week but it really shouldn’t be. Although it’s been tapped as the reason WTI oil has drifted above $100 a barrel, it’s only the last of several financial and geopolitical reasons that have kept oil strong for the past several months despite the shaky performance of just about every other asset class.
And now that the military has asserted itself in Egypt and taken Morsi down from power, there might be a tendency to think that the situation will cool and so will the price of oil, but I don’t believe that. The commentary on Egypt has been celebratory, but I doubt very much that the Muslim Brotherhood will take their stripping from power easily. Indeed, even as we watch closely the events in Tahrir Square unfold, we are conveniently forgetting the many other geopolitical tinderboxes in the Middle East and elsewhere continuing to brew. There’s a newly US-funded resistance in Syria, an Iraq on the brink of civil war, a new government in Libya – even the recent political problems in Brazil might lead to some production issues down the road.
Add this to the financial inputs into the crude price that I speak about so often and have written about in my book and you’ve got a market that even over $100 a barrel has all the risks to the upside.
As I recommended last week, higher beta Exploration and Production names will fare best in this environment, while the majors should lag. Oil services names should also be mediocre dependent upon where they are specifically focused and the refinery space looks all but the worst place to be. This has been borne out by the price action in the last week and if you took my advice and bought shares of EOG Resources and Noble Energy, you’ve done well.
So, my column this week doesn’t advance anything new except the trading advice to press the bets – if you’ve established positions in these two, you can take this opportunity of a Egypt ‘solution’ to add to both of these names and take half of that position and write covered calls on them – for EOG, I suggest August 140’s and for Noble, August 60’s will do the trick.
This is the strategy that’s been working for me in the past weeks and I think will continue to work. Hey, if it ain’t broke, don’t fix it –
See you in two weeks.