Don't Give Away Your Crude Gamma

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First of all, let me address the elephant in the room. I apologize for the lack of posts over the past few months. For the many who sent kind notes letting me know how much they enjoy the letter and hoping they will resume, I thank you. For those who have complained, I remind them that unsatisfied customers are entitled to a full refund and to contact your MacroTourist national sales desk representative. But before you ask for your nil cheque, please be assured that I intend to return to my regular writing schedule and hopefully you will be more satisfied going forward.

Now, onto the fun market stuff!

I had planned to write about a boring economic topic, but with this weekend’s attack on Saudi Arabian energy assets, I interrupt regularly scheduled programming to address the topic on everyone’s lips.

No need to rehash the news. By now everyone is aware of the details.

The development definitely caught the market flat-footed. Brent crude (which is more vulnerable to Saudi production shortfalls) gapped up almost $12 Sunday night.

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The new-found-oil-bulls were out in full force with all sorts of apocalyptic charts like this one:

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Yeah, I get it. This is not a positive development, but let’s try to keep this in perspective. It’s not good, but neither is it the end of the world.

And before you accuse me of not appreciating the seriousness of the situation, I remind you that I have long worried about a Middle Eastern escalation. Here is a quote from a May 24th, 2019 interview I gave on MacroVoices:

“One last thing I will leave you with Erik. Everyone is worried about the Chinese trade war, and although it’s not something that should be dismissed lightly, I contend it is more than fully in the price of all financial markets. But if I was looking for something to surprise markets, I would say it’s a real war or escalation of geopolitical tensions in the Mid-East. I am very concerned about the possibility that the Iran situation gets worse and that something happens in Saudi Arabia. So to me, if you were looking to hedge your portfolio, instead of going out and buying S&P puts, I think I would rather buy out-of-the-money crude oil calls.”

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Comments

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Moon Kil Woong 4 weeks ago Contributor's comment

Prices can rise significantly if war occurs or even if rumors grow. Sadly if there is war with Iran there is a good chance they will destroy more of Saudi Arabia's production in retaliation.

Terrence Howard 4 weeks ago Member's comment

Yes, the Saudis would retaliate against Iran as well. Iran's evonomy is already so fragile, could it survive a war?

Moon Kil Woong 2 weeks ago Contributor's comment

Even if it could the sad fact is there will be a lot of destruction to oil production even if there is a limited war.