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.
