The Privilege to Lend

If I was managing an oil portfolio within a Commodity Trading Advisor, I would have bankrupted myself and all my investment partners. Nobody can time Mr. Market, however even more importantly, successful investing and speculation requires an operator to comprehend the market’s sentiment. If you took the opportunity to buy oil when WTI hit a local record low of $80/bbl, you would have lost your nest egg within a week. On the other hand, if you had been lucky enough to remain short oil despite the several standard deviation event that pulled Brent from $110/bbl over summer to its current levels,

Christmas came a little bit early this year and Trilogy Capital is one of the lucky. This credit fund with $250mm AUM, returned almost three times the average for hedge funds this year to date according to Hedge Fund Research Inc. thanks to their short position in energy companies like Quicksilver and Connacher Oil and Gas.

However, oil is not the only commodity in pain right now. Gold has taken a beating. Goldman’s commodity index is down over 22% this year, as global markets identify the end of a real asset super cycle. It seems that in the last week, oil speculators are becoming more open to the possibility of continually depressed trading prices, and even greater price drops forthcoming. Crude futures are down 39% since June, which can certainly qualify as a market shock, however the reasons for the price drop seem more structural than cyclical at the moment. Oil is experiencing a flood of supply in the face of anemic demand, as OPEC members try to undercut each other in a pricing war while the US unloads 9 million barrels a year compared to only 7 million in 2009. Some even suppose that oil could head towards $60/bbl. Perhaps this is the time to pick up oil stocks while they are trading in the doldrums…