OIL - 20$ - Can it happen, how to short oil

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Submitted by newbiz on February 7, 2008 - 2:20am

Crude is at 87$ today and the futures for crude are trading at 87$ as far as feb 2009.

Here is my theory, US economy/consumption slows down, US needs for energy and oil will drop, so withh the need for so called emergim markets india and china. US slows down, chian has to slow down, production cuts and lesser demand for oil.

bottom line demand for oil drops, Price has to drop, I am guessing that we will see oil has to fall back to very close to where it alwasy used to be - 20$ or 30$

What do you guys think? Can this happen?
Assuming that this is can happen, do any of you guys know how to and where to short oil?, Where can I trade put options on crude, or is there a better way to short oil

Thanks

Submitted by sogon on February 7, 2008 - 5:33am.

One indirect way to profit from the price of oil is to trade currencies which have their value roughly based on the price of oil. Norway's entire economy is oil driven, so its booming now with the price of oil, and will most likely fall into recession if the oil price hits the target you are predicting.

Another indirect way is to buy stocks for companies which benefit from a fall in oil prices, fertilizer and other agro products are likely to benefit from cheaper oil. I'm sure there are others, but it is actually quite a bit 'safer' than raw bets against the oil price.

Submitted by waitingandwaiting on February 7, 2008 - 1:17pm.

Personally, I think you're dreaming.
But, if you want to trade your conviction without entering the futures market, the most direct way to trade oil is the tracking stock USO. The stock closely reflects the price of crude and some finished products. And, yes, there are options available for that stock.

Submitted by kewp on February 7, 2008 - 1:24pm.

There are ProShares Ultra-Short Oil&Gas sector...

http://www.proshares.com/funds/dug.html

I would think that would track the price of oil fairly well.

(and I also think you are dreaming!)

Submitted by GoUSC on February 7, 2008 - 2:39pm.

I think any decrease in oil demand in the US would be taken up by other countries. $20/barrel won't be happening. If the theory of PEAK OIL is true we won't see oil fall anytime soon.

Submitted by Arraya on February 7, 2008 - 6:54pm.

Oil prices are caught in a tug of war between slowing demand (at least in some areas), flat production and declining net oil exports. I do think that it is a mistake to overestimate the possible decline in demand with 100s of millions of potential eager new drivers in India and China and a $2500 car coming on the market.

On the supply side, there is continuing evidence that the annual decline rate in net oil exports by the top five net oil exporters is accelerating. Russia, for the first time in years, is currently reporting a monthly year over year decline in crude oil production, after a period of essentially flat production since October, 2006, and domestic petroleum consumption is exploding. All this with total world production essentially flat and not very likely to increase beyond 85 million bbl per day.

Maybe we would see those kinds of prices with a major reduction in world population or a severe world depression but thats about it.

Submitted by vemireddyp on February 8, 2008 - 8:53am.

The USO ETF doesn't have long term options, so you can't go farther than July 08 right now. People often lose money on options because they expire before the expected price move happens.

Another possibility would be OIH, which is an ETF of oil service companies, such as drillers, etc. Options are available to Jan 2010.

I don't think oil will see $20-30. Even if demand falls, you're at the whim of OPEC. Heck, you're at the whim of the Saudis. Then again, predicting energy prices is like predicting where the ball will land on a roulette wheel.

Just go to a casino. At least in a casino, you KNOW you're gambling. Plus, free drinks!

Submitted by stockstradr on February 8, 2008 - 2:22pm.

http://piggington.com/market_call_short_...

This topic has been covered, back in Sept '07. That should tell you how late you are coming up with this short oil play. Most pro's saw five or six months ago what you are now apparently just figuring about.

You are late enough to this play that oil stocks are already showing a "bounce" up, having already fallen (about 15%) in thirty days (DJ US Oil & Gas Index, DJ US Oil & Gas Producers Index). Oil is climbing back up off the recent lows. Guys like me have already made plenty of money on this bet, so our risk is much lower.

This doesn't have to mean you cannot still make money shorting oil, just that your risk is higher as you come late to squeeze a few dimes out of last part of a trend.

Ask youself: "Do I think the coming recession will be WORSE than what is priced into oil sector stocks already? Can I accept the significant RISK of shorting oil?"

I think most pro's would conclude you are an amateur (no insult intended) if you believe oil will hit $20/bbl. So they would advise an amateur not to play in this oil commodity game which is dominated by pro's.

Yet I have an instinct we will see oil sink below $60 / bbl within 24 months because this recession will be MUCH worse than has so far been priced into oil sector stocks. I plan to continue holding my short oil positions, but this IS risky.

IMPORTANTLY, understand that shorting oil is one of the riskiest bets you can make because of multiple unpredictable risk factors: war in iraq; terrorists damaging oil delivery systems or production facilities; bad weather destroy production facilities; China oil demand rises instead of falling (no recession for Asia);OPEC doesn't drop demand, which they are already threatening. Don't short with more than 10% of your portfolio.

ProShares "DUG" has been an efficient way for me to short the oil sect. However, shorting oil directly may be the best choice at this point, because oil is only $8 below its $100/bbl high, so has fallen a lot less than the oil sector stocks.

Submitted by waitingandwaiting on February 8, 2008 - 4:36pm.

stockstradr,
While you are correct that the oil service stocks have taken a nasty tumble since Oct 07, I would rather attribute this short success to the overall market bloodbath rather than special insights from the "pros". Afterall, there are also a lot of people patting themselves on the back for their shorts on Google, banks, gold miners, and just about anything else.

As you pointed out, crude itself can still be a good short trade as it is now only $8 off its $100 high (which is what the original question was all about). Incidentally, USO is also currently about 8% off its high.

I also suspect that when the stock mkt recovers, the oil service stocks will rise even if crude itself takes a dip. So, I'm really not sure how much of a correlation oil service stocks will have with crude oil.

My personal opinion: oil will be volatile for a long long time. If ever crude falls to $70, I'm buying USO with both hands.

Submitted by stockstradr on February 8, 2008 - 5:11pm.

>>I would rather attribute this short success to the overall market bloodbath

Well, it seems you're mostly correct on that, as the DJ Oil & Gas Index correlates fairly well to the S&P500 over last three months, except it appears the oil and gas sector index was hit harder falling about 5% more (fell further) than the S&P500.

[Personally, it doesn't matter to me if the overall market correction was the driver because in Oct '07 I had A LOT more of my portfolio bet on a downside correction in overall stock indexes than I had in short oil sector positions]

Yes, I also plan to start buying oil LONG at $70/bbl, and accelerate my buying as it nears $60. I absolutely view this recession as bringing the LAST opportunity to buy oil at reasonable prices during the first phase of onset of Peak Oil dynamics

Now the one problem with my little prediction of $60 oil might be say 20% (real inflation, not fake gov. stat's CPI) inflation on the dollar over the next 24 months and oil prices are set in dollars. Maybe I should qualify my prediction by saying I expect oil will hit $60 in inflation-adjusted dollars during the next 24 months.

One other comment, if there is ANY question if the "pro's" and non-pro's have been shorting oil based on predicted recession (demand for oil drops) then just TURN ON YOUR TV or read your newspaper! The short oil pundits have been out in full force in the media now for over a month, although I admit my claim is a little thin that they have been shorting oil since Oct '07.

Submitted by stx_jay on February 9, 2008 - 12:10pm.

Sigh.

You, sir, seem perfectly willing to put your hard-earned, after-tax dollars into an investment idea which you: A) know so little about that you cannot even be bothered to conduct a 30-second internet search upon price history (i.e., "always used to be $20 - $30"); B) have not the first clue as to how to monetize your theory (i.e., the mechanics of shorting oil); C) reach out to people whom you do not know for investment advice.

I suspect that if responders argued for you to buy real estate on the moon, you'd be imprinted with that notion, not unlike a baby duck would to a dog after it lost its mother.

Commodities prices react to changes in three areas: supply of the asset, demand for the asset, and the supply of the currency in which it is quoted (dollars in America). You have argued, by asertion only, for a change in the demand for oil. You have neglected to think about the other two areas.

You, sir, are a fool. Please park your money in a FDIC savings account. Granted, it will be eaten away over time by negative real interest rates, but at least this process will take years. Your money will last only hours in the commodities market.

Submitted by macmichael on February 25, 2008 - 7:39pm.

Almost 2 weeks since there was much posted on this thread.

For those who have thought it through alot. Have any of your thoughts changed in that period?

Submitted by paramount on February 25, 2008 - 10:55pm.

Prediction on gas prices

I took about 10 years of gas price data from around Southern California (AAA So Cal) and input the data in Excel. I had quarterly surveyed data points.

Using an add-on tool called Megastat, I had Excel come up with a model so I could use it to predict future gas prices. Once I had my initial model, I back correlated the prices to check for accuracy and it was nearly dead-on.

With that in mind, using the model I determined that gas will hit (on average) $4/gallon by Spring 2009 (May specifically) in So Cal.

Submitted by flu on February 26, 2008 - 7:55am.

I think a lot of market speculators that were shorting oil or buying reverse indexes on oil companies recently got their a** handed to them recently. Hence the dead silence. I don't know, seems like americans don't mind $100/oil, and as the us dollar keeps devaluing, i'm not sure where oil is going to end up.

It probably doesn't also help that there is an expectation of yet another interest rate cut, as I received a headline news this morning.

Although most analysts expect the Fed to go ahead with another 50 basis point cut at the next meeting, fears that stagflation may become entrenched are rising. 

That said, I drove a Prius rental car in spain last week. Europeans pay an arm and a leg for gas....I guess we're getting there ourselves. I was pretty impressed, except that it's a little weird that it drives like a golf cart when you first start up (being dead quite). It's probably not the best kind of car to drive in a crowded cities in europe, because people walk all over streets and are use to moving out of your way when they here your car's engine behind them...But in a Prius, it's pretty dead silent when you're rolling around in a crowded city. I'm considering getting a more fuel efficient car as a commuter. My only gripe is i wish there was an affordable full electric car. The Tesla roadster is a little out of my price range...And oh, I wish the Prius had slightly more attractive exterior packaging.

 

selfportrait

----- Sour grapes for everyone!

Submitted by Arraya on February 27, 2008 - 7:04pm.

"With that in mind, using the model I determined that gas will hit (on average) $4/gallon by Spring 2009 (May specifically) in So Cal."

We could still potentially see $4 gasoline by summer, but it is looking increasingly less likely that inventories will drive the price as they did last year. Inventories should start to come down as turnaround season gets into full gear, but we are starting this year in a more comfortable place than last year. To hit $4 by summer, oil prices will need to continue the current run - maybe to the $120/bbl range - and/or gasoline inventories need to start coming down quickly. If oil holds at around $100, we are going to have to see a pretty steep draw to get to $4 before summer.

Submitted by desmond on February 27, 2008 - 7:11pm.

Just got my oil & gas check from the land I own in Texas, up 50% from the previous month.

Submitted by Chris Scoreboar... on February 27, 2008 - 7:57pm.

In my newsletter release at the beg of Feb for January, I stated to look for a large upmove in Oil due to the commercials shifting to a heavy long position right at the ideal time for a seasonal low.

The tendency for a rally in Crude starting in Feb is one of the strongest and most consistent seasonal patterns that exists. When you couple that with the real pros the commercials being heavily long, you had about as good a setup for a rally as you are ever going to get.

If oil at a 100 is a surprise, you just need to learn what really moves markets, and it is not emotional opinions. Many here are heavily focused on fundamentals in RE, so why not be similarly focused on fundamentals in other asset classes?

Submitted by kewp on February 27, 2008 - 8:10pm.

Europeans pay an arm and a leg for gas....I guess we're getting there ourselves.

If we adopted European mileage standards our dependence on foreign oil would literally end overnight.

Submitted by paramount on February 27, 2008 - 10:13pm.

Based on the model, by the time gas hits $4 on average we will have probably already seen $4.10 (or something close to that).

The models fluctuates around specific prices - sort of like a low frequency sine wave trending upward.

Submitted by Arraya on February 28, 2008 - 12:22am.

"If we adopted European mileage standards our dependence on foreign oil would literally end overnight."

Even though this would help, it is far from correct if you look at the numbers. European milage standards are about 20% better than ours, at about 39 GPM.

The US uses around 23 million bbl per day. We do not import about 5 million. Also, only 70% of the barrel turns into gasoline.

"The tendency for a rally in Crude starting in Feb is one of the strongest and most consistent seasonal patterns that exists. When you couple that with the real pros the commercials being heavily long, you had about as good a setup for a rally as you are ever going to get"

This happens because the "pros" know that the summer blend switch is going on. That means they shut down refineries to retool their facilities. Hence the pros know that supplies are short and prices will go up.

Article regarding "Speculators"

http://streetwiseprofessor.com/?p=39%20h...

"If anything, the entry of speculators affects the price of energy price risk. That is, it impacts the “drift” in a futures price to an expected future spot price that is based on expectations regarding supply and demand conditions at contract expiration, rather than affecting the price of physical oil. Put differently, derivatives markets are primarily for buying and selling price risks rather than for buying and selling the commodities themselves. The delivery process ensures that futures prices converge to physical spot prices, but the amount of activity in contracts with payoffs tied to a commodity price need bear no relationship to the amount of the physical commodity available, and if speculators (and others) act competitively, the physical spot price will be driven by supply and demand fundamentals regardless of the magnitude of the “side bets” on commodity price risk."

RE: Fundamntals-Supply has been flat for 2+ years and is only going down from here, demand has been increasing and will continue to do so. It's that easy.

The big question is what will happend when we go down the other side of the bell curve of oil productin?

Submitted by macmichael on February 28, 2008 - 9:52am.

I have been trying to research how to best take long term position(s), since I also assume "peak oil"

ProShares Ultra-Short Oil&Gas sector...- appears short term trading vehicle?

The USO ETF doesn't have long term options - is this suitable for long term hold?

In my newsletter release at the beg of Feb for January, - Chris Scoreboar - is this a published letter for all to read or private? if public where do we go? Does this address long term holds?

So my follow up what recommendations does this group have for long term investments in this sector?

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