Welcome to Trade Ideas.
I am Brian Price, joined today by Tony Greer, founder of
TG Macro and the author of Morning Navigator.
Great newsletter.
Great man.
Great analysis.
We're so glad to have you with us.
Thanks very much, Brian.
Happy to be here.
Give me some perspective, with that in mind, of what we're seeing in oil, both recently
and then historically.
Sure.
The oil market is really interesting because we're in the middle of a historic sell off,
right?
In terms of magnitude.
I think it's really important to understand how we constructed the
rally so let me go back and go over that really quickly.
I think it's critical and understanding a trade set up that I'm going to try to put
on, a long energy trade here.
Why did oil rally from 25 to 75?
We had a synchronized global growth story that was running
along rather smoothly.
And we had the Saudi Aramco IPO on the calendar for the end of this
year.
We have to think back now.
Mohammed Bin Salman went on his moderation tour back in April or
May of this year.
What he was trying to do was sort of soften up the New York markets and
prepare for his trillion dollar baby: the Saudi Aramco IPO, right?
Remember now, they were looking for a New York Stock Exchange listing
this year, when only 2 months ago in July of 2016
we learned that the Saudi government was directly implicated in the 9/11 terror attacks which
killed over 3,000 people on US soil.
So he had to go over here and soften up the capital markets.
He met with all the captains of industry, from Bezos to Branson to Brin.
He met with the MIT endowment and the Harvard endowment.
He met with people in Hollywood looking to raise money for his Aramco IPO and tell
the story that he was going to be able to get oil back to a higher price, right?
Then he came out and shocked the world and he sent Khalid Al-Falih, his oil minister,
to OPEC meetings and he got them to cut production.
He got them to adhere to the production cuts which is
even more significant.
So we saw oil inventories draw down.
We saw the market go into backwardation.
And we saw the market rally from sort of the mid 50s
to $75 and the people that he visited on that tour were
able to capitalize on that trade.
They were both able to capitalize on the rally in flat price and oil,
and they were able to capitalize on the carry trade because as the supplies dwindle down,
the market went into backwardation, speculators
rushed into the market.
So then we eventually got to a point where we had about a half a million long contracts
positioned in WTI.
The trade community draws a bull's eye on that right away.
This is a position that's got to get popped, right?
So over the summer, the Aramco IPO was canceled.
And that shook me because I've been an oil bull the whole time and that shook me to my
core saying, they might just turn on the taps here and
spill oil into this market.
And I was amazed.
I sold some of my positions.
I was amazed that it had no effect on the market.
It was a little dip and it came right back.
So now oil's in the mid 70s and I get back to full length position.
And on October 2nd, Saudi journalist, dissident journalist, Jamal Khashoggi walks into the
Istanbul consulate and doesn't come out.
The following day, October 3rd, crude oil prince a new
closing high of 76-41 as this news is starting to circulate around the globe.
And then crude oil takes a 1 month nosedive to $65 in October,
right?
It doesn't stop there.
It takes another $10 nosedive through $55 yesterday.
Now, this pullback has become so swift and so steep, with so
much destruction in its wake, that I'm ready to buy into
this because a couple of reasons.
Number one, I think that the recession fears that have been circulating around the market
against this pullback in crude oil are dramatically
overblown, OK?
The way I look at the US economy, there may be a drag down from global economies
but here in the US, we've got confidence soaring and the recessions usually don't take
place for a year, year and a half after we get to a
peak in confidence, so we haven't even gotten to that peak yet.
The employment situation here is super strong.
Our PMI's are all running above 55.
I mean the US economy is humming, OK?
So I think that's going to lend some strength.
The second reason I like it on this dip is because nothing has changed about the physical
markets, right?
In October, China imported 9 and 1/2 million barrels a day of crude oil on average, right?
That's up 30% from October of 2017.
What's going on is the Chinese teapot refiners, private
refiners, are coming back after their maintenance season and they've started to buy oil.
We've got the US refiners coming back now after
their summer to winter maintenance season and they're
going to start to buy oil.
Now we started to see this strength reflected on the way down but it was very tough to see,
right?
Because the market was getting washed out due to a couple of blow ups.
But what went on behind the scenes was that during the commodity
roll over, while the index positions were rolling
into the next month, as the roll over finished, there was a huge rally in strength in those
spreads which to me were sort of those users coming
back and buying those cheap contracts for delivery
that had just been destroyed in the wake of this sell off, right?
So the reason that I get confident about buying this blow up in oil is because there is such
an obvious path of destruction in its wake, right?
Unfortunately, it starts at the very top at $76 with
Jamal Khashoggi disappearing.
It is taken out all 400,000 of those spec longs and WTI.
The market has undoubtedly started to turn towards
a short position.
As oil pulls back into the 2016 highs and 2017 breakout levels of the mid 50s, that's
about a 50% retracement of that move from 26 to 76 so
this is where I'm going to look for this steep sell off to
hold.
Also in the wake of the sell off are the second blow up of Pierre Andurand's oil fund.
If you recall, Pierre Andurand has already blown up one long
oil fund.
He raised money and went out and potentially blew up another one, which is
fine with me if he's an oil bull and he may eventually be
right.
And then we saw the spooky video from Option Seller's CEO who claimed that crude oil going
down and natural gas rallying was the rogue wave that took out his firm and lost untold
amounts of money right now.
I'm sure that will come in but, you know, that news will come out but he was
actively in the oil market bailing out on length and in the natural gas market bailing
out on shorts.
And it's been pretty clearly proven by the forensics experts in natural gas that that
was indeed the signs of a blow up taking place.
And if you look back historically on market moves, blow ups
usually leave a tradable bounce in their wake.
There are entire strategies based on sitting around
waiting for blow ups to happen and I feel like this is one of them as crude oil pulls
back into a good support level here.
I think we can express this in the markets by being long.
There are two trades that set up for me.
You can be long USO down here.
It's trading around $11 today so I think you can buy USO
between 10.5 and 11.5 and risk the rising trend line at $10.
And I think on a bounce, we could see USO back up to 13 and 3/4, 14.
So it's about a 17-20% trade with pretty tight risk reward
on the downside, you can risk less than 10% for sure.
And there's even, I think, a better risk reward trade lining up in unleaded gas.
In the ETF UGA, that's the ticker for the unleaded gas ETF,
that is pulled back to about $26.
And I think if you buy that between 25 and 26 and risk 24.5, 25,
you can put your stop on the other side of a rising
trend line and take advantage of the steep sell off.
And in gasoline, I think that UGA ETF can retrace all the way back up to 32 and 3/4
or 33.
So you've got over 20% shot at upside there.
So what I think is going to happen, while this story turns into number one, a pile on
the short oil trade and the fact that this move in oil has
made it to the front page of Field & Stream and every
other periodical out there.
We're starting to get sentiment go really negative in oil now.
That's generally a time that I want to buy.
And lastly, as this story turns into a game of 3D international chess, I think Mohammad
Bin Salman, as of today's headlines, has just
been given a green light to try to get the oil market back
in shape.
With all this in mind, walk me, walk the folks at home through the trades that you're putting
on to express all this information.
lYes, so I'm going to look at USO, the WTI crude oil ETF, I'm going to look to buy that
around 11.
I want to stop out below rising trend line.
That's about $9.80 now or so, so around $10.
I think that we've got upside up to call it 14.
Fair to say 14.
And then we'll see.
That'll mean crude oil back up into the high 60s, low 70s.
And the next lined up trade that's similar to that in unleaded gas, I think might be
even better risk reward.
We want to buy ticker UGA, that's the unleaded gas ETF.
I think we can buy it around between 25.5 and and 26.5 I want to risk 24.
That'll put it below the rising trend line in unleaded
gas and I think that we've got an upside trade of 32 or 33 and then we'll see.
You know I like to buy these dips here.
I like to get to my objective.
Take half profit.
Take a fresh look at the world and see where we are.
think that we've got upside up to call it 14.
Fair to say 14.
And then we'll see.
That'll mean crude oil back up into the high 60s, low 70s.
And the next lined up trade that's similar to that in unleaded gas, I think might be
even better risk reward.
We want to buy ticker UGA, that's the unleaded gas ETF.
I think we can buy it around between 25.5 and and 26.5 I want to risk 24.
That'll put it below the rising trend line in unleaded
gas and I think that we've got an upside trade of 32 or 33 and then we'll see.
You know I like to buy these dips here.
I like to get to my objective.
Take half profit.
Take a fresh look at the world and see where we are.
Yeah, why not?
Hey.
Tony Greer, one of the best newsletters out there, Morning Navigator.
If you don't have it, sign up for it.
It's good stuff.
Tony, thank you so much for being with us today.
Thank you very much, Brian.
That was great.
So Tony is bullish on crude.
He likes buying the WTI crude oil ETF, the USO, between $11-12
with a stop at $10 and a target of 14.
Additionally, he's a buyer of UGA, the unleaded gas ETF between $25-26 with a stop below $24
and a target of $33.
His timeline for both trades is four to six weeks.