Economic research is a weird business.
For instance, my specific area of expertise is energy, metals and mining. But the process of becoming an expert on those subjects also requires a working knowledge of several others.
The reason is because producing each one of those commodities requires the consumption of others.
Producing crude oil, for instance, requires steel tubes and pipes to drill wells…
Producing steel requires iron ore and coal…
Producing iron ore and coal require diesel fuel to operate the shovels and giant haul trucks…
And producing diesel fuel requires…wait for it…crude oil.
If you’ve ever wondered why commodity markets are cyclical, there’s your answer. Literally all of them are interconnected with one another in some way, shape, or form.
Also, each of those commodities transport their product in similar ways. Both crude oil and refined products are moved in pipelines, and pumped into storage tanks on trucks, trains, and boats.
Similarly, coal and metals are moved on trucks, rail, barges, and boats, and stored in stockpiles or warehouses.
In addition, all those companies pay their workers in local currency, so foreign exchange rates can have a big impact on operating costs. And anything that has a big impact on the global cost curve ultimately has a big impact on prices.
So in order for me to be any good whatsoever at my job, I have to be able to connect power, oil, gas, refined products, chemicals, plastics, coal, iron ore, steel, base metals, and precious metals markets with any relevant changes in shipping, logistics, storage, industrials, currencies, or geopolitics.
Yeah, I get headaches occasionally.
But it also means I look for logical connections at the intersections of these subjects, and very occasionally, that labor bears some fruit.
In this case, I think it has given us an early Christmas present of sorts.
It’s not a jolly old “ho ho ho” Santa Claus-type present, though. It’s mean and nasty, and it’s probably going to get really ugly…but at the end of the day, I think it will turn out positive.
You know, kind of like the Grinch.
So here’s what I found. As you may be aware if you’ve been reading along with us these past few weeks, you’re aware that every organization in the world who can print money is doing so.
The net effect for that is that the US Dollar strengthens versus all global currencies – the two buckets of which we want to target are emerging markets – which we are doing through Direxion’s Daily MSCI Emerging Markets Bear 3X Shares ETF (NYSEArca: EDZ) – and the Euro.
And you’re certainly aware that I talked about negative oil prices in the US earlier this week.
So, all I did this time was to look at them together – in particular, I charted the Euro versus European crude oil prices – and what I saw was as plain as day.
Source: Bloomberg, ICE
The Euro (white line) is being led lower by Brent crude prices (blue line) on about a two-week lag.
We can pair that knowledge with the fact that about 50 million barrels of oil are currently in tankers on their way from the Kingdom of Saudi Arabia to the US Gulf Coast, as reported by TankerTrackers.
And given that US oil production is only slightly down from all-time highs…
Source: EIA, Bloomberg
It means that we’re going to get another serious decline in US oil prices fairly soon.
And if US oil prices go down, Brent crude will also fall.
And if Brent falls, then the Euro and other oil-related currencies are going to fall.
So it’s pretty clear what the plays should be… I’ll just go through them one at a time.
The easiest way to play a decline in oil prices right now is ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO). We’ll go ahead and establish ¼ of any intended stake at market price right now, saving the rest for further instructions. The market is up today, so we’re getting a solid price here.
On the producer side, our $10.77 limit order for Direxion’s Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (NYSEArca: DRIP) also filled at yesterday’s open. It’s trading about $1 lower today, so let’s go ahead and deploy the final 1/3 stake now.
To play the currencies, go ahead and pick up the next ¼ stake in Direxion’s Daily MSCI Emerging Markets Bear 3X Shares ETF (NYSEArca: EDZ) at market prices.
And also let’s play the downside of the Euro by picking up the first ¼ stake in ProShares UltraShort Euro ETF (NYSEArca: EUO).
To offset these, we need to sell some things that have crushed it.
And our stake in Velocityshares 3x Long Gold ETN (NASDAQ: UGLD) has moved up by about 10% in just two days, so go ahead and sell. We will absolutely recommend jumping back in at a later time.
That’s it for now, though. In the meantime, I feel pretty confident these moves will bring us a Green Christmas within the next month.
All the best,