Trading the Coming Oil Price Drop

It looks like the price of oil could have peaked and will soon be entering the weak season. Lots of hedge funds are in this commodity. Once the sell off starts it will cascade quickly according to Bloomberg analyst. Oil may drop into the $70's...a drop of about 14% from the recent highs.

Oil related stocks and ETFs would be pushed down.

This could set up for a nice short on XLE, OIH or USO. They are already off by 1.5% today.

I might even consider the ultrashort DUG although its trading volume is far below my 1M criteria. This would likely be a swing trade.

UPDATE (post-close):
From Briefing.com: Another drag on the broader market was the energy sector (-0.9%). It got clipped along with oil prices, which dropped 1.8% to $79.50 per barrel. The decline was attributed to profit-taking from an overbought condition and a lessening of near-term supply concerns after a weekend storm passed through the Gulf of Mexico without incident.

From Bloomberg: Crude Oil Falls Below $79 as Naimi Says Markets Are in Turmoil

Crude oil fell below $79 a barrel in New York as production resumed after a storm passed through the Gulf of Mexico and Saudi Arabia's oil minister said energy markets are ``in turmoil.'' The market is in turmoil, let's leave it at that,'' the minister, Ali al-Naimi, said today in an interview in New York. He wouldn't comment further.

Crude oil fell as low as $78.96 a barrel on the New York Mercantile Exchange today as output increased in the Gulf. Prices have risen 31 percent since Jan. 18 as demand increased and OPEC members curtailed output. Prices shot to a record after an OPEC decision last week raised concern that supplies would be insufficient to meet demand during the winter.

``To a certain extent, Al-Naimi's right, the market has got completely confused with the financial aspects, the banking in collapse,'' said Rob Laughlin, a senior broker at MF Global Ltd. in London. ``He's just saying the recent spike up is overdone, and they're looking for an understandable correction.''

U.S. crude-oil inventories in the week ended Sept. 14 were 7.4 percent higher than the five-year average for the period, the Energy Department said last week. Supplies probably dropped 2.15 million barrels last week, according to the median of responses by 16 analysts surveyed by Bloomberg News.

The department is scheduled to release its weekly report on inventories tomorrow at 10:30 a.m. in Washington.

``If tomorrow's crude numbers are a bullish surprise, we could get one more rally before this thing moves lower,'' said James Ritterbusch, president of Ritterbusch & Associates in Galena, Illinois.