Yesterday the International Energy Agency issued an announcement indicating that its constituent members have agreed to release 60 million barrels of oil (NYSE:USO) over the coming months. However, if the goal was to significantly drive down the cost of oil and gas (NYSE:UGA), here’s how the news should have been released: as opaquely as possible!
Every savvy investor and trader knows the secret to moving markets is fear or greed related to the unknown. In this case, oil traders have already modeled in the additional 60 million barrel supply and adjusted their trading strategies accordingly. Consequently, the oil and gas markets will move lower in a very short span of time, then the new supply will be a non-issue competing against all the future geo-political and economic news to come. In other words, this move was like firing a bee-bee gun when it should’ve been a bazooka.
So how could the same exact release of supply cause oil and gas markets to tank? The IEA announcement should’ve looked like this:
“Major Sovereigns Sign Agreement to Release Large Supply of Oil Reserves onto World Markets”
How big is “Large Supply”? UKNOWN. When will the supply be released? UNKNOWN.
If you’re a speculator facing such large unknowns you would be forced to reduce your exposure to oil (NYSE:OIL) and gas — or better yet, short oil and gas — simply because you cannot measure the probability of the new supply having a major impact on markets. Just as the Federal Reserve brought Treasury yields to their knees and goosed the equity markets, sovereigns could have posed a huge threat to anyone thinking about going long oil or gas.
Too bad no savvy of the sort was used. Instead, we’ve now released some of the world’s strategic reserves and the best we can hope for is a few dimes of savings at the gas pump.
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