This perma-bear has decided to jump back into oil. The risk-reward has moved back to the reward side. Back a year or so ago, I stated that “Peak Oil” was real but its impact won’t be truly felt until the next economic cycle. While that cycle appears a long way off given all the problems worldwide, the price of oil in my eyes has come down far enough to begin accumulation of oil-related investments. It’s critical to realize we can go down before up so unless you’re extremely aggressive and a true speculator (we all are until we’re losing money), the best route may be to stagnate your purchases over a certain period of time or price levels. I think one should at least place one-third to one-half of their capital allocated to this sector right now. I don’t think anyone should use more than 5%-15% of their total investment capital into this sector (depending on many factors including your total wealth, age, risk tolerance and how much you would want to kill me if I end up wrong).
There’s an old song entitled, “What a Difference a Day Makes.” Just six months or so ago, oil was nearly $150 a barrel and the so-called experts said $200 was only a question of “when”. Now we hear calls for $25 or even lower. Have the fundamentals changed that much from just this past summer? For the short to intermediate term, yes. The tremendous economic contraction worldwide and especially in the U.S. (25% of the world’s daily oil consumption is in the U.S.) has and will continue to pressure oil prices. But make no mistake about it; the world will eventually recover to the point where Peak Oil does indeed become a living and lasting reality.
So, how should one play this? There’s no single answer, as many individual factors that each reader has will make “one size fits all” impossible. Only you know your circumstances. However, I can point to some ways I personally like and you can decide if their suitable for you.
Ideas:
- I’m still quite leery of equities in general but having direct exposure to the oil price itself is warranted. For me, I like DXO-NYSE for leverage. For unleveraged OIL-NYSE.
- For the many Canadian readers who wish to purchase Canadian ETFs, HOU-TSX offers double leverage to the crude price.
- As noted, I’m refraining from pulling the level on oil-related equities but if you so desire, look at IYE-NYSE and XLE-NYSE. For Canadian investors, look at HEU-TSX.
Breaking below a multi-year low is not usually a good time to buy anything, but I appear to have ants in my pants for oil. I haven’t heard one bullish comment on oil in weeks (just like I didn’t hear one bearish one near the top). Again, I must emphasize that in all likelihood this is not the bottom. We could go several dollars lower. But, if we do and you allocate as suggested, I think 1 to 3 years from now we should be looking at profits. Because I’m still very bearish on equities in general and the belief oil can still go lower, I’m going to refrain from oil-related equities at this time.
Watching 36.25 for support ..it was breached once today…if that breaks it will go lower imo
I been looking at Canadian Oil Trust companies like HTE PWE PGH thinking that while their stock price can go down (or up) with the oil price, I can collect decent dividends while waiting for the oil price to recover…
What do you think?
Mr. Peter G. calls Oil a buy (With prudent planning) …… THIS IS WONDERFUL ! ! ! ! ! Here’s some thoughts on Oil,
which may or may not be correct.
Whatever happened to Uranium exploration issues is a mystery. Prominent investment analysts were predicting that the Utilities would have a difficult time in 2008 keeping the lights on. Obviously, the data was apparently flawed and perhaps ‘Reprocessing’ or inventories readily furnished precluded the expected shortages. That’s always a danger – flawed information.
What is apparent, is that these markets have a mind of their own to maintain a direction once it turns. If in an uptrend,
it will continue rising regardless of deteriorating fundamentals and downtrends are often maintained as fundamentals turn positive, sometimes for a long time. This is especially so after extreme readings were reached at a previous
top or bottom.
That may be the case with OIL. Matt Simmins is an energy specialist, consulting to the industry with an understanding of Oil perhaps not matched by any one else. He is indifferent to speculators and the direction of Oil, merely reporting his studies and observations to inform the public and prepare.
The recently released I.E.A. study of the World’s 800 largest Oil fields shows that essentially most are in decline and the depletion rate is 9.1% per annum, far greater than assumed. The I.E.A. also projects worldwide demand in 2009 to remain flat as emerging economies, especially China, offset lower consumption in developed nations.
It could be that the I.E.A. is overstating demand which some people feel has gone off a cliff judging by a seeming abundance of crude. The supply chain takes 90 days from the wellhead to reach your gas tank. WHAT COULD HAVE HAPPENED is this……. The shippers of crude selling to the spot market are paid current prices upon arrival at dock. As prices were falling their tanker ships doubled speed crossing in 1/2 the time. The shortened supply chain may have created the illusion of over abundance while refiners and crude suppliers emptied their tank farms as quickly as possible to catch the highest price ahead of lower prices. Then of course, Oil is a paper driven market and the hedge funds exacerbated the problem while speculators were driven from the Oil pit with new ponderous paperwork tasks.
There may be no way of knowing, but a couple of days ago, when Oil was around $45.00 per barrel, Conacher Oil announced a production cut back from their Oil Sands project. If any one finds out differently, please post it here, but the lowest breakeven CASH production cost from Alberta Oil Sands seems to be $35.00 per barrel equivalent. That $35.00 or perhaps $30.00 could be the floor because producers would soon shut down production of 2 Million barrels per day, most of which is shipped to the U.S.
A couple of months ago, Matt Simmons pointed to the crucially small refined Gasoline stocks that threatened shortages if motorists decided to fill their tanks. It never happened, but with prices below $2.00 in many states, they may decide to fill their tanks once prices start to rise and that could create problems.
So here’s OPEC cutting back production nearly 5% since September. Will that be enough or has demand fallen off a cliff and the I.E.A. is overstating demand? Then we have to consider that the cost for deep water drilling, new Oil Sands production and other supplemental sources is close to $90.00 per barrel. So there’s no new supplies any time soon, at this price level and Matt Simmons believes that the Plateau period has passed and we are now on ‘The Downslope’. That’s significant.
If Matt Simmons and the I.E.A. are correct about Worldwide demand and assuming that the market was flooded by producers rushing to get the best price before it headed lower. So if the thoughts about a squeeze of the supply chain
to catch the highest price caused a temporary abundance of crude, perhaps we can expect a ‘Sawtooth Bottom’ while excess inventories are worked off.
Matt Simmins holds open the possibility that Oil may go up as fast as it went down. Whatever, but sooner or later Oil prices will go up.
Merry Christmas
SGGroup
Peter,
Thanks for the tip about DXO; I wasn’t aware of that option. I was wondering if you had any thoughts/suggestions about purchasing gold/silver as bullion, ETFs, or equities?
Thanks.
http://watch.bnn.ca/#clip122845
Peter,
You mentioned DXO on the NYSE for leverage on oil. How does that compare to LOIL on the LSE?
Thanks.
Peter,
Thanks for sharing your thoughts.
With regard to Peter’s recommendation on uranium when on BNN, thought we might all find the WSJ article below of interest.
By MOHAMMED HADI and MARI IWATA
Coveting uranium can get you into all kinds of trouble.
Unless you’re a power producer, in which case coveting uranium makes for smart business strategy.
Nuclear power plants are being built or planned around the world; from energy-deficient India and China to politically turbulent Thailand and Venezuela. By 2030, the number of power generated from nuclear plants could double, the International Atomic Energy Agency recently forecast.
Add to this the way nuclear power stations operate — “They run pretty much flat out, no matter what happens to electricity demand,” says Citi Investment Research analyst Alan Heap — and power producers fear they could face a shortage of the uranium.
So they’re starting to line up supplies.
Japan’s Kansai Electric Power — which accounts for nearly a third of the country’s total uranium demand — says it plans to buy uranium mines to ensure its long-term supply of the fuel. Its chief manager says he worries that in coming years he won’t be able to buy what he needs “no matter how much you are willing to pay.”
This could make uranium one commodity that will hold up relatively well to an economic slump. A nuclear power plant, after all, is just the kind of infrastructure project that a government might fund as its economy slows.
Tight credit has made it tough to launch new mining projects. Add to that short-term problems like the flooding of a large Canadian mine called Cigar Lake — and long-term demand growth from new reactors — and supply could be tight for quite a few years.
Uranium prices, and shares of the companies that mine it, haven’t been immune to market turmoil. Uranium’s spot price has fallen about 40% this year, according to a benchmark called the Ux U3O8 Price Indicator, but that’s also a result of the retreat of hedge funds from the market. Contract prices, analysts say, have held up better.
They will likely head back up in due course. Australia’s resources minister forecast a sharp rise in demand in the years ahead while celebrating his country’s first uranium delivery to China, in November.
Deals continue to be struck. This week, the Nuclear Power Corp. of India tapped France’s Areva to meet its uranium needs; it was the first foreign supply pact to be struck in India, where at least 14 plants are either planned or already under construction.
Write to Mohammed Hadi at mohammed.hadi@dowjones.com and Mari Iwata at mari.iwata@dowjones.com
Done, a small position on HOU. My first ETF investment. Thanks.
[...] Oil – Read this from yesterday. [...]
If I buy a tanker of crude at $33 per barrel today, I could get $43 as long as I can keep the tanker from getting to port for a month. Right?
Does this make any sense?
Another oil double long ETF is UCO. An oil double short ETF is SCO.
To answer Bud:
The safest way to buy gold is the GTU ETF. If you want some silver exposure the safest way to buy is CEF. CEF might be the better buy right now as the silver:gold price ratio is at historic lows and either silver needs to go up or gold needs to come down, or both.
i too am in canadian trusts. pengrowth and paramount. dividends too good to be true. even if they lower them, i feel the long term monthly payback helps take the edge off the drop they have experienced lately. then i am in when they go up. sane or insane move?
Firstly, Peter – I would like to thank you for this blog. Over the last few years, I have eagerly tuned in when you are on television and have read much of your material so I was excited that you were providing a blog for those tracking. In a market where many of the analysts seem to have self motives, you have been a light to many of us who are searching for clear thinking folks who really understand the markets and share their views to the public with honesty and integrity. As a Pastor and a believer, I am doubly thankful to you for sharing your faith openly. Having been an atheist in my past, I know it can turn off some readers but we are called to proclaim our Saviour and how he has transformed our lives. God definitely works through this so for the few who may have been turned off by it, I’m sure there are more than a few that He has blessed through it (myself included).
I’ve been reading your blog since its inception but wanted to chime in on this as, since the market plummeted, I have turned to more of a trading mindset. Living in Canada – I have been trading some of the horizone betapro etf’s – in this case – HOU. As much as I personally think oil is in a bottoming process, from my own experience, I would be cautious with buying HOU with the intent of holding it long term (and possibly some of the other ETF’s stateside). From my own experience of holding them for a week at a time, I have learned that your capital will be eroded – as volatility increases – so does erosion. HOU had a few days this week where it traded 10X its normal volume and the other days 5-6X. With this, it lost approximately 2% of its value in addition to the significant decrease from Monday to Friday of this week.
In addition, they work on a rollover system which can be troublesome with contango (which oil is currently in). So, for the last half of the month, much to many people’s surprise (including my own), HOU has been trading on the February contract – not January spot price. So you may have thought you were buying in at $33 oil today, but it was really $43 oil (I would suspect it is the same with the US ETF’s). So, as it was down about 34% from its peak on Monday to today’s close, it has actually been trading February’s contract all week, which is sitting at $43. Therefore, if the February contract goes down to $35 (as did January) before the rollover to March in / around Janaury 10th, one would be down an additional, similar amount. Today there was a $10 gap between January and February contracts at the close – the most in many years, if ever, which represents a significant glut of oil on the market today.
With these ETF’s – as the capital is eroded over time – my strategy is only to trade daily or in short periods when you feel you have a clear signal of direction. I personally do not think we have this just yet on oil….only that oil seems psychologically very cheap at these levels. The bottoming process can take some time & OPEC’s cuts will take time to work into the market. If inventories don’t improve over the next few weeks, and there is nothing to suggest they will in this short period, we could see the February contract start to move lower from the $43 level it is at right now – hence losing another big percentage on HOU. I would susect we may be in a $30-50 trading range for some time. This will likely work against these bull ETF’s as the contango rollover can wreack havoc on your portfolio. Although you expect oil to be up in a few months or a year’s time – if you get nailed by these rollovers a few months in a row, by then, you may need oil to go to $70 or higher just to recoup the money you lost sitting in HOU thinking you were buying at the bottom.
If these ETF’s were a pure commodity play (on spot price) without erosion and contract rollovers, I would be a big supporter of buying at today’s spot prices, but this is not the case. If you bought HOU when the January contract was $40.50 a couple of weeks ago, it would have cost you about $2.75. The February contract is now $43 (which is what HOU is valued at) and it closed at $2.57. So if you thought you were buying HOU because oil seemed cheap at $40.50, you would be down about 7% on your stock price while oil is up about 6% – hence you are really down about 13% on your perceived investment. A bit of that is erosion, but more of it is them rolling over into the February contract in the meantime.
Oddly, even though I think oil will be quite a bit higher in the spring, I would probably favour HOD (which is the bear on HOU) or shorting HOU over the next month or two as I think it has a better chance of going higher with cantango & these rollovers (however, I would be more inclined to trade it rather than hold it). I do, however, think when we begin to see supply becoming an issue in the coming weeks / months – HOU could be a really good momentum play, but if we were to even just trade sideways for 2 months – you could possibly lose about 15% of your investment on erosion alone as it is compounded at the end of each day. I can’t speak for DXO, OIL or USO which are the common ones in the US but my understanding is that these lose value too (the leveraged ones more so) and do the rollover in a similar fashion to HOU. I, as Peter, would be weary of the oil stocks (or ETF’s representing them) until we see a definitive upward direction in oil. The ETF’s have erosion too but aren’t as directly affected by the monthly contract rollover. Anyhow – all just food for thought as we work out our investment strategy and how to possibly benefit from low oil prices with the idea they will be higher down the road. I have yet to find an investment that I am comfortable with so if anyone has a strategy that can benefit purely from spot prices, I’d be interested to hear it.
Thanks again for your postings Peter – they are very helpful and have often influenced my decision making. I thank God for your restored health and wish you and your family a blessed Christmas as we celebrate the birth of our Lord.
Chris
Chris, thank you so very much for sharing your insights on ETF’s. How ever did you determine they did not trade on spot price? The weekend edition of the WSJ has an article on oil storage and how it is up up up with Enbridge (ENB) benefiting in a big way from its Cushing storage facilities. Your message was so positive it provides hope to the rest of us. While I believe God will take care of those who turn their lives over, it is still somewhat depressing to live in these troubling times especially when we are tasked with taking care of our children and getting them through college. I am a professional who still has a job and go to this blog first thing every morning. I believe Mr. Peter is using his God given talents to help us steer through these darkest of day. Best regards Ps. For those Christians here, read the book “When the Game is Over It all Goes Back in the Box” by John Ortberg. The best I have ever read and more inspiring that even Rick Warren’s book!
Of interest on dxo…thought I would take an initial position on dxo and hou for a pop in feb contracts on Monday…..but on dxo very strangely I had placed an rder 20 minutes before the close at 2.60…it was at 2.65 at that point….right at the end still no fill and then all of a sudden trades go thorugh at 2.53 so I thought okay my order was picked up. Strange thing is, I was not filled yet it traded to 2.53, seven cents under my bid. Now t’m not going to bother with complaining but you have to wonder who got the low fill and whose shares were given to them lower than the bid price. Wonders will never cease on this crooked stock market.
Chris,
You are bang on regarding HOU and those ultra ETFs. They are really just for day trading or extremely short term position trading. The longer you hold them, the more you get ground down. Check out this article.
http://www.financialpost.com/story.html?id=1059799&p=1
Seeing as how we are talking commodities, copper might be a play along with oil. Especially in light of Obama’s infrastructure plans. You can trade the copper ETF which is JJC. Copper seems to have limited downside at the moment as does oil.
Hi Susan,
Thank you for your kind words. I have been confused about ETF’s for some time – mostly the betapros so I have spoken to them at length. What they do is they stagger the contracts from one month to the next early in the month. On the 6th,7th and 8th business day of the month – they begin moving to the next contract so February happened on these days in December – same will be true for March when these days arrive in January. It generally has not been a big deal as the difference from month to month in the past has been marginable. However, we are now in contango so the nearterm monthly spreads of oil prices have become significant as we have a glut of oil on the market. Until this changes and supply tightens – we will likely see large differentials from the spot price to the following month. As December moved on, it was clear there was going to be a lot of oil on the market come January so it continued to plummet but February they are still uncertain of, so it is trading higher. Also, there is an encouragement to buy oil in January and sell it in February if you can sort out a way to store it. This is all fairly normal when your trading in contango but dramatically effects the value of the ETF’s. It can be a dangerous game and pattern as you are not really buying a spot oil price – you are buying the value of that months oil at that time. Two weeks later the value of that oil could be much higher (as the rollover occurs) but the value of the ETF will not reflect that. I’ve learned this the hard way so I’m happy to pass it along to other investors so they can benefit from my wounds.
These are very troubling times Susan – I think the uncertainty is what is scariest of all. I totally empathize with your fear around personal finances and affording to send your children to college – a definite concern and worry. Fortunately, we believe in a God who cares deeply for us, knows what is best for us and promises to provide for us (as you stated). In the West, as a culture, we have been living in slavery and addiction to consumerism and ourselves for a long time while not helping our fellow man locally or globally. Of course there are many great examples of people and churches doing wonderful, selfless things, but as a mass we have failed. God has been pretty patient through this, but possibly the best thing for us as a culture is to be awakened to a deeper dependence on him. I don’t think it is a coincidence that the Christian faith is thriving in places like Africa where there is real fear about getting the next meal or having a shirt for your child’s back – while in NA, true faith has been dropping off – particularly where I’m from in Canada. Greed is a funny thing – when we have a lot materially – it can often be challenging to rest and depend on God in a deep and relational way, as we are conflicted in our worship (without alway be conscious of it).
Jesus talks a lot about money in the Scriptures and how it is our greatest obstacle to overcome to fully commit ourselves to Him. We have seen our tithes down but our numbers up at church and I wouldn’t have it any other way. We don’t know what tomorrow will bring but we are told it will have enough worries of its own. No doubt our faith will be sharpened through this season and those without faith will be drawn to ask bigger questions. I trust that through prayer, Scripture study and community, we will not only get through these tough times but grow more rapidly into the servants God is calling us to be. The story isn’t new – it is only now real to us as many are experiencing it for the first time. It has been exasperated as it has happened much more rapidly than anyone could have predicted. As we are all more and more awakened to the corruption and greed that has been driving our system and the evaporation of our own personal finances and security (that we thought we had), I have no doubt it will be a time when God will be worshipped and glorified in new and astounding ways. In that way, it is exciting but doesn’t immediately change the real fear and concern that most of us have experienced during this significant downturn.
I agree wholeheartedly Susan – Peter is a beautiful man who is sold out to Jesus and using his gifts to help the little guy. He has been a personal blessing to me and many others – some who post here and countless others who have personally benefitted and been comforted by his sharing.
Blessings at this special time of year!
Chris
ps thanks for the book suggestion. I’m familiar with John Ortberg but have yet to read that one – I’ll look it up!
Thanks Klaus…I did read that when it came out….covers some of the overall points on how these ETF’s can be dangerous in general…thanks for sharing it! The most oddly represented of the lot are HGU/HGD (gold stock etf’s). They make no sense – they have both been hammered down significantly over time.
Here is also an interview with the President of Horizon betapro….he was on bnn when a lot of media hoopla was attacking their credibility.
http://watch.bnn.ca/the-close/december-2008/the-close-december-3-2008/#clip118351
Best,
Chris
Chris, thanks for that info onhou, never realized that it wasn’t trading on the current spot. Even makes less sense now that i didn’t get filled on friday. There was abit of momo at the end, most likely investors trying to grab for the boost on monday. I did think it odd that there would be a big spread and the etf’s still lingered.
Hello Peter,
I have read that DXO has credit risk while UCO does not. I wonder if you could address this difference at some
point when you have time? Thank you for all your work. Have a blessed Christmas and a peace filled New Year.
HI Peter,
I own natural gas ETF UNG and am wondering if your bullish on natural gas. So far I am happy with how it is holding up compared to my OIL holdings. Would also appreciate comments from anyone on this blog about UNG.
Together we are becoming more profitable investors
I would be a buyer (USO) at these levels, but not all in. Those with an appetite for risk would go long DXO. Buy some and don’t check in on it every min. massive oversold conditions exist (check out the MACD for starters).
[...] – I threw my hat back into the bullish camp in the waning days of [...]
Hi everyone…..
First time on…..
Have seen Peter on BNN many times………One of the best….
Regarding the person that mentioned a gas etf
That would be hnu here in Canada.
Closed at $4.39 on last trading day…thats Can. dollars.
Agree that these Etf`s should probably be bought on a major dip and traded toute suite.
Correct also about the Jan and Feb contracts re: hou…….
Probably the same format is used on the hnu…….eg. watch those prices if they are forward months.
incidently the HOU traded over 15 million shares on last trading day of the year.
Happy to be on board…..Holiday greetings to you all….
Robert
Thanks Robert for your reply on Natural Gas, I have been hearing from some reputable people that they see Nat G.. going to $9. by April. Right now Nat G is at $5.89
What does Peter and his readers think about this?
To bullish?,to bearish,? I think it’s to bullish
The pundits here are calling for natural gas to reach $7.00
In the meantime several of the gas companies are capping there wells at this $5.65 price.
Thats exactly what happened last year and guess what?…After 6 months…..The price zoomed up to $13.00
The weather here in Canada has been dastardly….much like the U.S.
Hou (oil)……………or HNU (gas)…. TSX
Take your pick……….both should do well. I`m debating too coach……
Robert
Be advised that HOU (oil) split on a 1 for 5 basis as of today Jan. 2nd.
Closed at $14.15………up $2.05
Robert
[...] market I turned bullish on back on December 18, 2008 is oil. I’ve waited to take any significant positions in equity oil stocks because at that point I [...]
can you please explain the meaning of double leveraged etf. example hou. How does it work? I look forward to your reply.
[...] turning bullish on oil again back in late December, I greatly increased my fondness for it earlier this month by urging much greater exposure to it. [...]
[...] A significant part of those profits came from oil stocks that I placed in the portfolio in late December and early January when oil was significantly below $40. Back then, the crowd was again all in concert about too much oil and a further decline to as low [...]