Contrary to what I'm hearing from yet another analyst on CNBC, and for much of the past month by others... 2012 looks to me like the year oil will move back towards supply/demand equilibrium, which according to OPEC's own economists, is around $70/barrel for WTI. When the smoke clears, markets will again shift focus to underlying supply/demand conditions and realize the world is swimming in oil.
Rumors of Iran blocking off a supply route through the Persian Gulf are insanely overblown. Worldwide demand is slowing. Europe is in recession. U.S demand is flat. Brent is the best indicator, and it is currently over $113. I would look for Brent to move towards $93, and WTI towards $85 in the intermediate term (1-3 months). By July, I would look for WTI in the upper $70s to lower $80s.
The short-term trend is relatively flat, even while volatility remains relatively high. This equates to overpriced options and a great environment for call writing (Ex. Jan USO 41 Call around $0.70). For the more aggressive trader, whether on a daily, weekly, or monthly basis, purchasing puts with an expiration between March-May looks to be a relatively safe play, especially on any pops to $103 WTI.
With WTI hovering around $102-103, I'm comfortable buying puts here or shorting USO, and will be until we find support in the mid $80s. The impact of current and potential supply disruptions will be lessened as the year progresses. New suppliers in Libya are coming online and other countries, such as Japan, are already reducing their oil reliance on Iran, which further reduces the Iranian impact on supply.
Remember, as with any option trade, timing is critical, so don't go broke waiting for the move. To play more conservatively, push any put option positions out until a March or April expiration, and roll positions into the next month's every four weeks.
As world-wide growth slows, demand for oil will once again be in the spotlight. The Fed will not intervene with more Q.E, the U.S. dollar will continue to strengthen (relative both to the Euro and Yen), realization of Iran's limited influence will finally be realized, and U.S stockpiles will continue to increase. All of these factors equate to demand-driven commodities trading lower. Any upward movement we're seeing here is based on hopes for Fed intervention or a supply shock from Iran and not improvement in underlying demand or supply conditions.