by Travis Johnson, Stock Gumshoe | May 22, 2012 3:57 pm
We haven’t covered a pick from Dr. Kent Moors for a while, the erstwhile Duquesne professor (actually, not erstwhile — he’s still there) has been a pretty active stock teaser over the last year as he tries to build up the subscription base for his Energy Advantage newsletter (along with a few other higher-priced trading letters), and readers have sent me lots of questions about his latest prediction of “oil to $200 by July 1!” … so I thought we’d better take a look.
Moors’ shtick is that he’s a highly sought after consultant in the energy business, with a client list that boasts many of the major oil companies and petro-states, and that these connections put him “in the know” as he chooses investments.
And he opens up, as he usually does, with a little self-congratulatory bit that shows off his connections:
“The Windsor Energy Group is a small network of foreign ministers, international banking executives, energy policy makers and Big-Oil CEOs.
“Every year, the 26 of us meet at Windsor Castle to discuss pivotal developments in the energy market.
“More importantly, we plan for their impact.
“This year, however, something unexpected happened.
“Twenty-four hours before I boarded the train to the Castle, several other Windsor attendees called me to an emergency briefing back in London.
“The meeting required absolute secrecy. No email. No cell phones. No outside communications.
“I can’t tell you the names of the people who were there.
“But what I can tell you is this:
“After talking with some of the most important people in the world about oil, I’m certain that $200 a barrel is now a low-ball estimate.
“And the spike is imminent.
“Oil Prices Are Set to Soar on July 1st“
I don’t know if Kent Moors is actually a member of the group — it’s a sort of annual advisory/think tank-y meeting about big energy issues, sponsored by oil companies and others — but he did speak to them this year (PR from Duquesne about it here, FYI). This year they had talks about most of the big issues you’re probably familiar with, including the opening up of the Arctic to oil exploration, and shale gas in Europe, and I’m sure they must also have talked about Iran.
Which is the point of that “July 1” deadline for the price of oil to hit $200 — Moors is indicating that he thinks the embargo of Iranian oil, which Europe has promised to respect by July first, will send the price soaring. I expect he knows a lot more about the dynamics of the international oil trade than I do, so you can make your own decision about how you think this will work … will Europe’s refusal of Iranian exports mean that those 600,000 barrels/day go off the market? Or will they be bought up by people who don’t care about the embargo? It’s a big political issue at this point, the July 1 deadline is “real” to the extent that it’s been talked up a lot, and that’s the date the EU says they’ll stop buying Iranian oil and, perhaps more importantly, will stop insuring shipments of Iranian oil, but the negotiations are ongoing with the larger Iranian customers in Asia (most Iranian oil goes to China, India, Japan, and South Korea).
So if no one will buy Iran’s oil, or if the Straits of Hormuz are shut down by Iran or by military action against Iran from Israel or elsewhere, the guess is that oil will rise further — and, of course, none of this happens in a vacuum: this is going on while many oil consumers are also cutting back because their economies are faltering a little bit, thereby reducing demand for oil (that’s right, we’ve got to worry about both sides — supply and demand).
And if oil rises to $200 this Summer as a result of the Iranian foofaraw, however it turns out, what will that mean for our wallets? Well, Moors says he’s got an idea to make you rich as a result … here’s how he describes the expected run-up:
“Crude oil inventories are at their lowest point in nearly 9 years.
“And now another 600,000 barrels a day are on the verge of coming off the market.
“What’s more, Europe doesn’t even have a plan to replace the lost supply.
“After talking to my sources in Brussels, I’m convinced that European leaders have absolutely NO idea how they are going to fill the gap.
“And that’s the problem.
“With less supply and constant demand – at a minimum – oil can only go higher.
“In this case, it could go up so high – and so fast – that you may pay more for a gallon of gas this summer than you ever have in your life….
“The Iranian embargo is about to trigger the biggest global oil shock we’ve seen since 1973.
“In three months.
“And yet this new embargo could have a much greater impact than the ’73 campaign.
“The market simply can’t withstand yet another big dent in supply.”
The market has obviously not been focusing on this with the same perspective as Moors in recent months — after all, oil has come down pretty hard from its highs in March, though it’s still higher than the lows set last Summer and Fall.
More importantly, if Moors is right, and if you know exactly when the price is going to skyrocket, you should be able to get rich, right?
Here’s how he puts it:
“All you have to do is make one simple move.
“Sooner the better…
“At current prices, if oil hits $200 a barrel on July 1st, you could see gains as high as 1,288% or more on this situation.
“That’s enough to turn a hypothetical $500 into $6,940.”
Smells like leverage, right? Indeed it is — though it sounds like he’s talking about the leverage offered by short-term options.
He makes clear that he’s not talking about trading directly on the futures exchanges, which is how most big-time traders would speculate on oil — it’s a bit of a pain in the neck for Joe Investor (you and I) to learn how to trade futures and to handle it effectively just to make one speculation like this.
And “pain in the neck for Joe Investor” means, if you ask a marketer, “I’m not gonna sign up for the newsletter if I have to do something complicated to get rich.” So Moors has a plan to play off of this expected spike in oil prices using some other investment. What is it?
Here’s his spiel:
“The Only Way Left for the Little Guy to Grab Big-Oil Profits?
“The opportunity I’m showing you today is simple. It’s a standard order you can place with any online broker.
“But the profit potential is anything but ordinary.
“You’re about to harness the awesome power of the futures market… without playing the futures market.
“If you’re familiar with oil trading, you already know that the real money in oil – the kind people live off of for the rest of their lives – is made in futures….
“You no longer need a million-dollar “rainy day” fund – or steel nerves – to play this game.
“The ‘little guy’ finally has a shot.
“This new trading tool is so simple, it’s like trading a stock. But it moves in lock step with the price of oil futures.
“And the best part is…
“You can use this tool to quickly pull in super-sized gains.
“So if oil jumps 62% – to the $200 price I expect – then you could see gains as high as 1,288% or more. All in the next three months.”
OK… so the clues are a bit limited, right? Never fear, that’s why we keep a giant tank of propane here on Gumshoe Mountain, to make sure our Thinkolator is always fired up and ready to go. Toss all those little clues in, and we learn that this is probably …
Options on an oil ETF.
Which is about as far as we can go with certainty … but if we speculate a little bit, we can figure out what the big deal will be:
Moors is not talking about West Texas Intermediate (WTI) crude oil — that’s not impacted as greatly by Iranian shortages, since oil that we’re buying in Cushing, Oklahoma to satisfy the WTI futures contracts is generally sourced from the US and Canada and travels in via pipeline. What he’s talking about, I’m quite sure, is Brent Crude — the oil contract that has become the standard for international seaborne trade in crude oil.
Which is not to say it won’t impact the US — quite a lot of our oil comes in via tanker and is priced off of Brent in some way. But it means, I think, that he’s probably talking about speculating in the price of Brent Crude versus WTI.
Which means it’s quite likely that he’s talking about the ETF that tracks Brent prices in the US — the United States Brent Oil Fund (ticker BNO).
And, more specifically, since he’s talking about oil going to $200 in less than two months and profiting by 1,200%+ from that move, he’s talking about speculating on the relatively near-term options on BNO.
BNO has options available for both July and October expiration, and I’d bet that the July expiration is probably cutting it a bit close and he’d want to give himself a little bit more time to be “right” and let the story play out. And coincidentally, if we look out at the October call options on BNO we can see that the highest strike price available right now also has an unusually large open interest (meaning, compared to the other contracts available, there are a lot more of this strike/expiration combination in existence) … which usually means either that there’s a large trader who’s standing apart from the pack, or that there’s a specific recommendation out there for this option contract from a newsletter.
That strike is the BNO October $95 contract, which means the buyer gets the option to buy BNO at $95 anytime between now and October 19 (that’s the option expiry date for October this year). And while the BNO October $90s have open interest of 140 contracts and volume today of 40 contracts, which is similar to all the other contracts out there, the BNO October $95s have open interest of 8,318 contracts right now and volume of more than 800 contracts today. So that’s enough confirmation for me to presume that Moors is pitching this option.
Can it really provide 1,200% returns? Well, here’s how it would work if Moors is right:
The current price of BNO is about $75, and Brent Crude is at about $108. If the fund does manage to track a spike in BNO prices — and it might do OK at that, since these kinds of futures-based funds tend to be better at tracking changes over a few weeks or months than they are over longer periods of time — a move to $200 Brent would mean a spike of roughly 85% in the oil price, so we’ll guess that BNO could also move 85% during that abrupt spike.
If you bought the BNO $95 call option, that means you could theoretically exercise your option at $95 and sell the shares at $140. You wouldn’t do that, since no one (OK, almost no one) exercises options when it’s easier to just sell them back to close the option contract, so since the option contract would be in the money we’ll assume that there’s not much of a premium built in anymore, and the $95 call option late this Summer, when Brent is theoretically over $200 and BNO hopefully keeps up and breaches $140, would be worth $45.
It costs about $1.25 right now, so that’s a return of about 3,500%. Which is a heckuva lot better than Moors was promising. So either he’s toning down the rhetoric and really trading for something a bit lighter like $160 oil, or I’m just wrong in my speculation about what he’s pitching.
There are also some even more leveraged ways to play Brent Crude on the stock market (without going directly into futures), if you’re so inclined — I have no idea whether or not oil prices will spike this Summer on Iranian issues or not, but if they do and Brent soars then the leveraged ETFs would likely, if they’re working correctly (and so far they’ve been fairly close at least in direction if not full amplitude), provide even crazier returns. That would be the VelocityShares 3X Brent Crude Long ETN, ticker UOIL, which is supposed to move three times as far as the Brent price in any given day — there aren’t options available on that particular ETN at the moment, which is probably just as well because it’s crazy enough already. If Brent had a steady upward move from $108 to $200 over the next few months, that ETN could theoretically have a steady upward move of well over 200%, though “steady” is key since these leveraged ETNs use a complicated mix of futures to hit their goals, and they really only have a hope of mimicking daily changes, so if there are big up and down swings the overall return can easily be significantly worse than the underlying index.
But the best solution I can come up with is BNO options for this Kent Moors teaser — so we’ll leave it at that, and open up the floor for questions and comments!
P.S. Moors also pitches a little stock that benefits from the disconnect between Brent and WTI prices in the other way, by buying up WTI and refining it into gasoline, thereby making better profit margins than the refiners who aren’t connected to Cushing via pipeline and have to buy Brent crude off of tankers. Here’s the brief spiel:
“And this gigantic energy traffic jam means that one well-positioned little refiner is getting its crude oil at a serious discount.
“It’s paying around $40 or $50 a barrel LESS than its competitors.
“It takes all that discounted oil and converts it into end products like heating oil and gasoline.
“Then it turns right around and sells those products for the inflated prices we’re seeing in the market right now.”
That’s not a lot of clues, but I reckon he’s still pitching the same refiner as he has in the past using this same basic story, Western Refining (WNR) — my article about his prior tease of this one is here, and it’s been doing well lately — he teased it in the mid-teens back in October and it was bouncing around between $12 and $20 for a while back then, but is now near the top of that range at about $19 and it’s getting some love from analysts with a couple upgrades this week. If Brent soars but WTI doesn’t, that would theoretically be a continuing advantage for them, at least in the short run.
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