A little over a year ago, I gave my S&A Resource Report readers a report called “The Chokepoint and the Trophies.”
As I showed them, Iran was just a few moves away from sparking a conflict in the region that would send oil prices straight up. In a war with the West, Iran’s strategy is to close the Straits of Hormuz, a strategically critical “chokepoint” for world oil transports.
Because oil prices were vulnerable, I detailed a trading strategy called “oil insurance.” If you buy the world’s oil “trophies,” you’re “insured” against a disruptive spike in oil prices, which can cause other assets to fall.
[ad#Google Adsense]So we bought the largest “safe” source of oil on the planet: Canada’s tar sands. We bought Suncor, a giant Canadian tar sand oil producer.
Spiking oil prices translate into much higher profit margins for tar sands producers. Every bit of bad Middle East news pushes the value of this prize higher.
And while the bad news out of the Middle East over the last year wasn’t exactly what I expected… there certainly was plenty of it…
By October 2010, Iran had taunted the U.S. to the brink of a shooting war. Then came the government overthrows… First Egypt, then Libya, and now Yemen have ratcheted up the fear factor in the world’s oil markets.
Take a look at the chart below… You’ll see that since last March, crude oil (the black line) has exploded more than 40%. Suncor (the blue line) was up as high as 68% before backing off down to 60%.
In other words, “oil insurance” worked as advertised.
So with oil prices near new highs, is it time to buy more oil insurance? I don’t think so. Not right here. The event we were insuring against has already happened. Oil has already had a heck of a run.
If you already own oil insurance, hang on… with a tight trailing stop. There could be more disruption to come in the oil markets. But after such a big move, and with so many people bullish on oil right now, this trade offers more risk than potential reward.
Good investing,
— Matt Badiali
[ad#jack p.s.]
Source: The Growth Stock Wire