Monday, December 08, 2008

Oil, Oil, Everywhere, Nor any Drop to Pump

Samuel Taylor Coleridge's "Rhyme of the Ancient Mariner" is famous for its signature line: "Water, water, everywhere, nor any drop to drink." The Mariner's sailors lamented their thirst in the midst of plentiful water. In a cute segue (thank me later), China thirsts for oil in a world still awash in recoverable black gold. Brazil discovered lots of oil very far underwater, and China wants to help pump it out:

China wants to loan Brazil's state oil company $10 billion to help develop massive new oil fields in deep water off the coast of Rio de Janeiro, Brazil's top energy official said in comments published Monday.

Investment implies partial control. China needs above all else to maintain some healthy level of economic growth to forestall internal unrest. Securing access to non-OPEC oil is one way to do that. OPEC is going to make its oil harder to come by anyway, if they can pull off this near-term cut in production:

Oil prices rebounded from four-year lows and shot above $43 a barrel Monday as OPEC floated the possibility of a "severe" production cut and several countries announced new measures to boost their economies.

Why make a threat if you can't make it stick? OPEC members that used to cheat by abandoning production cuts after OPEC announces them now have less leeway to do so as their own producing fields reach geological plateaus. Most producers would go along with a cut either out of inertia or as a way to boost their currency reserves with income from higher oil prices.

Can I make money from this possible oil action? China's move won't have an impact on supply for years, so the OPEC announcement is something I'll wait to hear. Short puts on USO are looking much safer now if production cuts drive up the price of oil. Furthermore, higher oil prices are usually also bullish for gold in the short term. The proposed cut will be announced on Dec. 17, and short duration options expire Dec. 19, so if I sell a put option on USO it will have to be one dated Jan 09. Watch this space.