RE:RE:RE:Tax Loss Selling this Year...We should look at three possible outcomes:
- No cut and the meeting ends in disarray
- modest cut
- significant cut
1. My greatest concern is that if OPEC does not cut production on Dec. 4 the crude market could have a major hissy fit. I could see crude plunging into the low-$30s in a (hopefully) short lived capitulation under this scenario. The Saudis would certainly know this risk exists and they may not have the stomach for such a scenario to unfold. They are under tremendous pressure both internally and externally to get a grip on the market which leads to the next possible outcome...
2.To some extent the Saudis have already won the war against the shale and other high cost producers and could choose to gradually start ratcheting the market back up. A small cut of 1-1.5M bbls with a promise to cut more as to the "maintenance of an orderly and balanced oil market" (as they like to say) might be their best strategy. This, in conjunction with a 2016 world demand growth of another 1.2-1.8M bbls would reverse the price deterioration and commence an orderly recovery back to the $70s by the end of 2016, while at the same time not reflating the shale boom. I think there are reasonable odds of this occurring.
3. On the other hand a significant surprise production cut (say 4M bbls as they did in 2008) from OPEC and possibly one or two non-OPEC countries could move Brent back into the $50s and higher very quickly. As much as WE would like to see this happen, this strategy would risk reflating the shale boom, something that the Saudis would not like to see after having spent so much monetary and political capital in the last year engineering the current strategy. I don't give this a very high probability.
As a defensive strategy I have sold near the money Dec and Jan calls against my O&G ETF's. I have not sold any IAE as I agree we are now getting too close to Stella and I am satisfied with my risk exposure. I might even add to my position under the #1 "hissy fit" scenario, although I will stick with my prediction that we have seen the low ($.49) in IAE. Scenario #2 would create a stronger and more sustainable crude market which in my opinion would set the stage for the next energy bull market to commence. Scenario #3 would create a boomerang effect which may or may not be sustainable for very long if it reignited the shale boom.