Covered my oil (USO) short...

I think there is more pain ahead for oil, but I made some money and I don't want to see it evaporate. 12% gain. Updated my FAZ prices for the reverse 10:1 split.

Hedging

Bought 10 SOJRZ (June 26 SSO Puts) for ~$0.45 each. Sold short 200 USO (Crude Oil ETF) @ 38.69.

Sold my remaining commodity plays out of my 401k, now up to 97% cash.

NYMEX Crude Reversing Contango

On the news of dwindling stockpiles of crude (hardly) but a real dwindling of gasoline futures (really), the NYMEX crude futures curve has flattened out dramatically. NYMEX July Crude for delivery is up $1.25, but NYMEX crude for delivery in July 2010 is only up 10 cents. The one year variance for crude is only marginally over $7, or about 10%.

I'm not saying we're going to backwardation overnight, but it will be interesting to see what happens. This could portend higher prices on the spot, but lower relative prices on the back months which means DXO (2X crude - 6 month) might not go anywhere but USO (1x crude - front month) may ramp.

Long (live) commodities

The dollar has broken. As I indicated before, that means commodities are off to the races.
Backup the trucks boys. Gold, Silver, Oil. All the good stuff. Why limit yourself to the physical commodities? The stocks are going bananas too.

More on natural gas

Take a look at this chart. This is chart of the crude oil / natural gas (NG) ratio. Whenever the ratio gets near 14-15, natural gas outperforms oil. Whenever the ratio gets below 7, oil outperforms natural gas.


We recently registered over 15 two weeks ago, at 15.41. This signals that natural gas will outperform oil on a relative and likely absolute basis.



Let's take a look at the other inflection points:

15.75 in Sept 06 to 6.78 in Nov 06: Oil ~0%, NG +105%: NG REL/ABS OUTPERFORM
6.78 in Nov 06 to 15.92 in Aug 08: Oil +146%, NG +54%: OIL REL/ABS OUTPERFORM
15.92 in Aug 08 to 6.01 in Dec 08: Oil -72%, NG -52%: NG REL OUTPERFORM
6.01 in Dec 08 to 15.41 in Apr 09: Oil +35%, NG -46%: OIL REL/ABS OUTPERFORM
15.41 in Apr 09: NG will outperform on a relative and likely absolute basis

The play? I like being straight long Natural Gas (UNG). If you want to be hedged, short crude (USO).

Oil Markets

The Oil markets are always perplexing. I've long been an oil bull, and remain so even after the bubble burst. Price action again, like last year, defies supply/demand logic. As RVASpeculator would point out, this is indicative more of currency devaluation than fundamental production or demand issues.

Today, more builds in oil and gas stocks. And DXO was down to 2.83, and now it is positive and at 2.99. A simple trade that has worked for the past few weeks is to buy pre-EIA stocks release at 10:20 on Wed and sell on Fri of that week. I'm sure it won't continue forever, but something I am taking note of.