Why I?m Keeping My Oil Short

Let?s call this the weekend of love. On Friday morning, we were looking forward to a long weekend of missiles raining down on Syria and the regional conflagration that would follow. The price of oil reflected as much, with west Texas intermediate trading all the way up to $112.50.

Then the British Parliament voted against their country?s participation under any circumstances. President Obama then dropped a bombshell of his own, asking congress for a resolution approving military action. He made this request of the least productive congress in history, one that rarely approves anything, whose sole mission is to oppose and embarrass Obama in all circumstances. Flocks of doves were seen circling the capitol dome. The next print for oil was $106.

Obama?s move is entirely political and very clever. He has put the Republicans in the uncomfortable position have having to vote against military action, something they have been clamoring for over the last two years. The sole exception here is the libertarian wing of the party lead by Senator Rand Paul of Kentucky, who opposes all wars for cost reasons.

More importantly, constitutional law professor Obama is setting an important legal precedent here, requiring a congressional declaration of war on this, and all future, military actions. The United States has not declared war on anyone since it did so against Japan in December, 1941 in the wake of the Pearl Harbor surprise attack. Every war since then, and there have been more than 20, has been solely at the discretion under the cover of the War Powers Act. Of the last 23 years, America has been at war for 14 years without any official declaration. The president is not only asking for belt and braces support for an attack on Syria, but also placing the legal handcuffs on all future warlike presidents.

My short position in oil through my bear put spread on the United States Oil Fund (USO) has certainly given me a roller coaster that I had not bargained for. I sold it expecting that the turmoil in Egypt has peaked for the short term. That assessment turned out to be correct. Then we got confirmation of the poison gas attack, something you don?t want to hear about when you are short oil. Only Israel?s missile test today is preventing oil from falling further, fast. Welcome to the oil market.

After the weekend?s action, the oil market has entirely backed out the Syria gas attack. I was sure we were in for a quiet weekend, as there was no way that the US would attack with UN inspectors still in Syria. That would be rude beyond belief. I was definitely paid for my beliefs. My loss on my oil short was pared back from hair raising to moderate. Better news was the gains I scored in my yen and euro shorts, which both collapsed on the dovish news.

So what to do about the (USO) from here? I think that congress will eventually vote for an attack, providing Obama with the fig leaf he is demanding. Oil will spike again when the missiles eventually fly. But with the congressional sand now in the works, that could take weeks, or even months. In the meantime, my options position in the (USO) expires in 13 trading days. So at this point, I am inclined to hang on, run out the clock, and sing anti war ballads until then.

When we do get the next spike in prices, I will sell short again in double the size. Now that the summer is over, the actual supply/demand picture for oil is terrible (click here for ?Why I Sold Oil). Wall Street is holding a record long in the futures market, which will soon come to grief, once the news flow from the Middle East slows.

I am inclined to do so with outright puts only, instead of a put spread to maximize my short-term profits. I may also buy some of the ProShares UltraShort DJ-UBS Crude Oil ETF (SCO), a 200% short fund that profits from falling oil prices (click for the link for the website http://www.proshares.com/funds/sco.html ). I think that the final end game here is for Texas Tea to grind down to $92 over coming months, a prolonged move that an ETF is better disposed to profit from. A 20% drop from the top is certainly something worth taking a bite out of.