Oil Calling An Audible

Oil inventory data came out yesterday that was interpreted bearishly by the market. Longer term I think the trend in oil is going to be up. I don't think we will see last year's prices any time soon. I do think though that the uptrend may have been broken in the short run , so as per my Playbook, I am going on the defensive a bit in this sector. Specifically what I did yesterday was to lighten up in my more risk oriented accounts by selling the positions that I had in the leveraged oil services ETFs. I will look to re-enter this particular leveraged ETF when the money flow indicators show me there is a decent risk-reward again. I may also sell part or all of the positions that I have in oil itself. I have not decided to do that yet. Since this isn't an advisory service I doubt that I will post on this if I do sell this out. I am unlikely at this time to sell my oil exploration or oil services ETFS because I do think that the longer term trend will still be up although that thinking could change as events change.

I've put up this post because I was more bullish on oil last Friday. {Link here: http://lumencapital.blogspot.com/2009/05/oil-goes-boom.html } What changed in my mind? I'll let 24/7 Wall Street summarize because they do a better job than I can.

"The D.O.E. released weekly data for crude oil, and the losses in weekly inventories appear to be a bit reversed this last week. Crude inventories came in up 2.866 million barrels at 365.977 million. This is significant, because we had estimates for black gold looking at a draw down of 1.5 million barrels after two solid weeks of prior draw-downs.....Gasoline stocks may lag a bit, and these came in slightly down at -215,000 barrels to 203.2 million barrels.......
...The good news here is on the supply front and what it means for prices. It shows that if prices rise too much, there is an impact on demand even if you consider that demand was much higher a year ago at much higher prices......
We are also entering the summer driving season at historically very high levels. There is always the notion that this logic is coincidental rather than leading or truly reflective. That is how it looks now with oil above $65.00 per barrel. Demand destruction occurs at higher prices, and more and more unemployed or underemployed workers will likely continue to erode demand .." Link: http://247wallst.com/2009/06/03/higher-oil-prices-already-impacting-inventories-uso-oil/#more-36540

Note: I'm posting this because it represents somewhat of a change in my thinking in a brief period of time and I feel I owe readers an explanation of such. In the shorter term at least I think the price of oil will at least be stagnant and now may even come back in value. Longer term I still think it's going higher. But think with the move and now perhaps a change in sentiment it is time to hedge my bets a bit. So we'll hang on to the drillers and explorers for the longer term view of rising oil. We're letting go of some of the more speculative ETFs and maybe even crude itself.

*Long USO in certain client accounts. Long sector ETFs relating to oil drilling companies and oil exploration companies. Please note if you are not a client of our firm you should first consult your own investment advisor or do your own homework before acting on any of our information.