We have just closed a very profitable trade on crude oil in the ZYX Short Sell Change Alert. The trade involved a spread between United States Oil Fund LP (USO) and United States Brent Oil Fund (BNO). Following are two relivant posts from the Real Time Feed of the ZYX Short Sell Change Alert:
LETS UNDERSTAND USO AND BNO TRADE
BNO, which represents Brent crude is primarily used in Europe. Libya is a big producer of Brent crude. When the rebellion in Libya started, Brent crude prices rocketed. Now that Libyan crisis is coming to an end we expect Brent crude prices to fall.
The reason Brent crude prices have not fallen quickly in the recent days is because of the reports that there is significant damage to the oil infrastructure in Libya. Our analysis and resources dictate that the foregoing conclusion is wrong.
Our analysis shows that Libya will start producing over 1 million barrels a day in a matter of months. We were content with out small short position in BNO and were planning to add to it until we scrutinized Bernanke’s speech in Jackson Hole last Friday. Bernanke obviously has better data than we do, so we have to respect his conclusion.
We analyse economic data from 23 countries. The data shows that the growth in emerging markets is slowing, but Bernanke indicated that the growth in emerging markets is not slowing.
If the growth in emerging markets picks up, oil prices will go higher.
Out of six ZYX Change Method screens, two are positive on oil, two are negative on oil and two are neutral. Therefore, we are not ready to take a directional position on oil in general.
But to reduce risk in BNO position going against us, we will hedge it with USO. We expect the spread between BNO and USO to narrow. If we are right, we will make money on the trade irrespective of the overall position of oil.
Please understand that we are not recommending a buy on USO as a directional trade.
Our preference is to enter the USO hedge at a lower price, preferably around $32.50 or on upside break of $35.10. But the market is very volatile and we will need to keep a close watch on it.
TAKING PROFITS ON USO BNO SPREAD
This trade has worked out very well, now it is time to take profits and exit the trade. The chart shows how the two instruments have behaved ‘” just like our prediction. USO is at $36.27 and BNo is at $ 76.06 as of this writing. This position is now exited and will no longer be followed.
