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Did You Buy Oil Last Week?

Written by Briton Ryle
Posted September 16, 2019

It's been said that it is better to be lucky than good. Sounds good, but it's not really accurate. If all you have is luck, if there's no competence or understanding whatsoever, then you're basically a fool. 

The real meaning behind "better lucky than good" comes from Louis Pasteur, when he said that fortune favors the prepared mind. In other words, you're more likely to get lucky when you've spent some time studying your subject matter.

And I've got a perfect example of this from my Wealth Daily article from a week ago, “Don't Buy This IPO.”

Here's the relevant part of the article: 

The Saudis say ARAMCO is worth $2 trillion. They want to sell $100 billion worth for cash money. And it looks like Jamie Dimon and JP Morgan are getting the lead. Rumor has it that Morgan Stanley lost its bid after it shafted the Saudis with some ridiculously overvalued Uber stock at $45 (trading for ~$32 now).

I'm going to say this as clearly as I can: DO NOT BUY ARAMCO STOCK. 

The whole point of investing is "buy low, sell high." If the Saudis want to sell their crown jewel, what does that mean? I think it means ARAMCO won't ever be worth more than it is right now. 

So if you really wanna profit from the ARAMCO IPO, here's how.

The Saudis are trying to push the IPO to November. And there's just one thing that will make this IPO work: higher oil prices. 

Now, the Saudis just replaced their oil minister with one who will keep the production cuts coming. Tighter supply means higher prices...

Oil's gonna rally. But the way to play it isn't with U.S. oil companies. Too much debt. 

Your best bet is call options on the United States Oil Fund (NYSE: USO). Or if you really wanna get wacky, check out the triple-leveraged United States 3x Oil Fund (NYSE: USOU) and get three times the price action. 

I don't know if you've seen the price of oil yet today... Ha! Who am I kidding? Of course you've seen that oil is up $5 after an attack on a Saudi oil terminal...

Well? Do Ya Feel Lucky?

So I hope it's clear that I had no idea Yemen was gonna sling some Hellfire missiles from a drone. (Sure, I've got some connections, but there are limits.)

No, my recommendation to buy some call options in oil was just good ole horse sense, whatever that means. I see the news that the Saudis replaced their oil minister with a stooge that would do MBS' bidding, that they are announcing investment banks to run the ARAMCO IPO, and that they want that IPO in November instead of next year — what else am I supposed to think? 

Now, full disclosure: I was wrong about U.S. oil stocks. They are FLYING. Whiting Petroleum (NYSE: WLL) is up like 35%. Nutso. 

The U.S. Oil Fund (NYSE: USO) that I recommended calls for is up only 11% or so today.  

But I'll tell you right now, do not write in and tell me I got it wrong. Because if the 400–500% ramps on pretty much any USO call you might have picked is wrong, then I don't wanna be right...

Price Leads Sentiment (The Case for Technical Analysis)

Here's something I want you to watch over the next couple weeks: Pay attention to how sentiment for oil changes.

Investors have been bearish on oil for a couple years now. It's been awful. Analysts are talking about "peak demand"... Norway is selling all oil assets... even the Saudis want out.

But now watch the analysts come out and start talking about how global oil demand looks fairly good for the next year or two. Watch them point out how electric vehicle sales in China have been falling. Watch and see if some U.S. oil companies get upgraded...

Because this is what a rally does. You see prices rising, and it's practically an instinct to imagine them going higher. Investors will rewrite the old narrative to justify their new expectations for price. Yeah, it's confirmation bias. That's how markets work...

Price always precedes news. Don't forget: Oil was up early last week, a perfect projection for the move that is happening now. And these types of sentiment shifts almost always have legs. Some traders will have doubts and get short, others will take profits too soon — they'll cover and re-buy, and the rally continues. 

So if you happened to take my advice and buy some calls last week, congrats. And you can probably hold them for a little while.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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