The “No-Brainer” Way to Play the World’s Most Precious Commodity

Over the weekend, a series of drone raids in Saudi Arabia ravaged the world’s biggest crude processing facility.

And now, naturally, everyone is talking about oil.

Oil is a part of everyday life for the planet. We all use it in some form or another, and there is perhaps no global commodity in higher demand – demand that will only increase over time.

Oil is that “black gold, Texas tea.” Recognize that tune? As Jed from The Beverly Hillbillies discovered, oil has brought riches to many.

And it can bring riches to you, too.

Prices are extremely volatile. Just think about how often the price of filling your tank changes.

This spells some serious profit opportunity for traders. If you understand the forces that drive this volatility, then oil can put money in your pocket in no time.

Here’s everything you need to know right now…

Use This Sure-Fire Strategy to Hunt Down Oil’s Hidden Cash

You don’t have to go shootin’ at some food and leave the ground bubblin’ up some crude like Jed to make money in oil…

Instead, you can trade the precious commodity to profit.

It’s important to know what influences the price of oil and, better yet, how to predict where it’s going next. Crude prices are incredibly sensitive and can change in a heartbeat based on news, global events, politics, and more.

What creates such a high degree of price sensitivity comes down to economic basics: supply and demand.

Supply

97 countries pump out an average of 80,622,000 million barrels of oil a day. Over half the supply is produced by the following five countries:

Barrels/Day

1. USA 15,647,000
2. Saudi Arabia 12,090,000
3. Russia 11,210,000
4. Canada 4,958,000
5. China 4,779,000

After these countries, Iraq, Iran, and the United Arab Emirates are the next biggest oil producers.

The Organization of Petroleum Exporting Countries (OPEC) was formed in 1960 to work together to alter supply and control global oil prices. It is comprised of 15 member countries, including Saudi Arabia, Iran, Iraq, United Arab Emirates, Kuwait, and Qatar.
The OPEC is a dominant force in the global oil market and its market-moving decisions are closely watched by governments, corporations, consumers, investors/traders, and oil companies alike.

Restrictions in supply result in higher oil prices. That’s why when half of Saudi Arabia’s output was hit, oil prices skyrocketed. Other examples of restrictions in output include:

  1. OPEC supply adjustment
  2. Tensions in the Middle East (e.g. Saudi attack, and a possible U.S. attack on Iran)
  3. Severe weather (hurricanes in the Gulf of Mexico)
  4. Political

These multi-dimensional forces directly impact the price of oil. If you want to trade the commodity successfully, then you have to consider these four forces.

Demand

The price of oil impacts families, corporations, and countries alike. We all use it in some form or another. Demand is high and will likely remain high for years to come.

Currently, the world consumes over 100 million barrels of oil per day – a number that has been increasing each year since 2009. Despite green sources of energy, world oil consumption is forecasted to increase to 140 million barrels by 2040.

Multinational oil and gas company BP PLC (NYSE: BP) claims that at current production capabilities, the world will actually run out of oil in 53 years.

Again – demand is high and will only get higher. When forecasting the price of oil over time, this is an important distinction.

Predicting Price

To say that the price of oil is volatile is an understatement. Over the last 20 years, the price of oil has fluctuated between $28 to $164 a barrel.

As I write this, oil is trading at $62 a barrel, up from $55 a few days before. It spiked over 12% after Saudi oil facilities were attacked over the weekend, reducing global supply by 5%. Iran is suspected in the attack, and Washington is “locked and loaded,” ready to respond and further increasing tensions in the middle east.

Remember – an attack on Iran could reduce supply and drive oil prices up even more.

Trading Oil

One direct way to trade oil is to buy and sell oil futures. I told you about oil futures earlier this week. These highly leveraged instruments can produce big profits… and sometimes, big losses.

A safer way to trade oil is with exchange-traded-funds (ETFs).

The most liquid and popular oil ETF is the United States Oil Fund (NYSE: USO). It tracks the daily price movements of West Texas Intermediate (“WTI”) light, sweet crude oil.

Here is a four-year chart of the USO:

As you can see, it tracks the price of oil nicely. It’s also a good surrogate for oil futures.

Given a long-term bullish prognosis, a simple and effective strategy is to buy USO when it is in the low part of its trading range.

Over the past four years, USO has traded between $8 and $16 a share. So, buying the USO in the lower part of the range and selling it at the upper end is a solid strategy.

It’s safe to say that USO will not go out of business in the near future, nor drop much further than $8 (it’s all-time low is $7.67). So there is limited downside to this play, even at the current price of $12.40.

But you can make even more on this stock play, supercharging your returns by selling covered calls.

Note: I discussed covered calls often in my special Masterclass videos. Make sure you’re signed up to receive the next one by learning how to get on my list here.

Let’s look at an example…

Right now, $1,240 will buy you 100 shares of USO at $12.40. The USO October 18, 2019 $12.50 calls are going for $0.60. By selling them, you’ll receive a $60 credit!

If you do this every month, you could take home a 4% monthly return ($60 / $1,240) on your investment on an asset that will, in all likelihood, go up over time – and certainly not that much lower from here.

There’s no such thing as a “no brainer” when you’re trading the market, but selling covered calls on the USO is as close as it gets.

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Good trading,


Tom Gentile
America’s #1 Pattern Trader

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