End of Oil Play (at least for me)

Early last week, oil has dropped to US$90 and by this week it has bounced back to US$110 on the back of the US Treasuries US$700 billion bailout plan.

For me, this signaled the end of oil play. Why?

• The bailout plan may signify that there's major weakness in US economy to warrant such tremendous plan. This weakness is felt throughout the world including all emerging economies. As demand destruction is already in play since July 2008, it is my belief that the demand cannot be reduced further as it has already reached bottom. However, as the world economies are slowing with some already in recession, it is my prediction that demand cannot increase in the next year or two and thus capping oil prices.
• The cost price of extracting oil is around US$50-$70 per barrel* and this is coined by several broadcasters and based on some reports. If this is correct, this is a good place to exit oil play as oil producers will definitely sell their oil at profit price and will do all they can to push up oil above their cost price. Regardless of whether this is true or not, I'm going to take profit from short trade.
  

Thus, exiting the oil play at this point provides a profit of roughly 20% from the point of entry where shorting oil of around US$132 (July 2008) and when oil is now at US$106 at the point of writing. Or, if you follow my advice and exit at anything below US$100, say exactly US$100, this would represent ~24% return.

Related blog link: Crude Oil Trade... The starting of the end??

* the cost price of oil is assumed to include the compensation for producer's own consumption and possibly the residents of its owning countries.