The short squeeze in equities on Tuesday was a direct result of the spike in oil prices ahead of the Doha meeting on Sunday. Energy analyst, Jon Kilduff said "This could be the mother of all buy-the-rumor, sell-the-news events." Expectations are more than high, they are ridiculous and go against recent comments from Saudi Arabia.
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USO - US Oil Fund - Company Description
The U.S. Oil Fund is designed to track the daily price movement of WTI crude oil. This is the simplest method to speculate on the direction of crude oil on a short-term basis.
The USO, or any futures ETF, should not be held long-term because it bleeds value when the futures roll over once a month. On a short term basis it works great for speculation.
Crude oil has spiked 15% over the last several days with a 4% rise today alone. This is speculation over a production freeze agreement in Doha, Qatar on Sunday between OPEC and major crude producing countries. On Tuesday Russia's Interfax news service quoted some diplomat in Qatar saying Russia and Saudi Arabia had agreed to freeze production even if Iran decided not to participate.
This is contrary to what the Saudi deputy crown prince has said over the last couple weeks. The prince said Saudi would not participate unless Iran and the other major producers all agreed to freeze production. Obviously, he could change his mind but after making those statements more than once a change of heart could make him look weak.
There is significant potential for a Doha disaster where the meeting deteriorates into a brawl and nothing is accomplished. Even if they do agree to a freeze that would still maintain 1.45 mbpd of excess production at current levels. Iran, Libya, Kuwait, Iraq, Nigeria and the UAE all have plans to increase production so it would be a major change of plans to agree to a freeze. Most have said they would not support a freeze but when it comes down to the meeting, anything is possible.
Lastly, OPEC members are notorious about saying one thing and doing another. They could all agree to the freeze, wink wink, in order to lift prices and then continue on doing what they are already doing and pumping every barrel they can produce.
I believe there is a good probability we will see oil prices significantly lower in the days/weeks following the meeting. I am recommending we buy an inexpensive put on the USO and see what happens. If you are aggressive you could also buy a call just in case a miracle does occur and prices spike higher. I view that as nearly impossible since Saudi Arabia has said they do not want to see prices much over $40 because that would allow U.S. shale drillers to increase production.
Buy May $10.50 put, currently 56 cents. No stop loss.