I have never seen so many people jump on the $100+ oil bandwagon, as I have seen over the last several months. And yes, as a contrarian, this makes me a tad bit uncomfortable.
Barclays Bank is now officially throwing their hat in the $100+ oil camp. From Reuters:
LONDON (Reuters) - Investment bank Barclays Capital has raised its crude oil price forecast for 2008 to more than $100 a barrel, citing lower-than expected supply growth from countries outside OPEC.
The forecast is the most bullish among 30 banks regularly polled by Reuters and follows a spate of downgrades to estimates for supply outside the Organization of the Petroleum Exporting Countries.
We pushed it over $100 for the first time, said Kevin Norrish, analyst at Barclays. The non-OPEC supply data as its coming in has been much worse than we thought.
The obvious question is...where these strategists/analysts a couple of years ago when oil was at $40-$50/barrel?
I know for a fact that most were not predicting $100/oil. Heck, most were actually expecting oil prices to decline. I love this picture of me on CNBC...Can you guess what my answer was?
Yes...it was $70! In fact, I was interviewed on Marketwatch TV in February of 2006 saying that I believed that oil was heading to $100+. Now, I bring this up to share with you my bullish credentials. However, I have now turned bearish.
In fact, I want to let you know that I am as big of long-term commodity bull as they come. I understand the fundamentals that are driving this commodity bull market...I have even written a book about it! However, I also understand the speculative froth that often enters the markets...and the trend following approaches that hedge funds and other traders implement. The leverage aspect of the futures markets also allows for a lot of money to come in( and go out) in a quick period of time. The end result, of course, is that while the oil bull market will continue to climb higher for the next 7-10 years, it will also experience extreme volatility as prices will often get ahead of themselves.
In my opinion, we are now in the oil pullback mode. The move to $110/barrel was largely based on speculation and hedge fund interests. Fundamentals did not warrant such a rapid move up. Currently, energy supplies are showing a buildup and a slowdown in the US economy (the largest oil consumer) will have an impact on oil demand.
Here is a good article from The Sunday Times.
I believe that you will also see the take-the-profit-and-cover-the â€“margin-call position from many hedge funds as the stock market continues to unwind.
Going forward, I expect further volatility in the oil marketâ€¦but a trend that will eventually take us back down to the $75-$80/level. Longer-term, I still believe that we will eventually see a move up to over $200/barrel.
One of the advantages of this current investment era is that individuals are now able to profit from declining market conditions. In the past, moving ones money into cash was really the only option during a recessionary environment...or even pullbacks in certain sectors.
Today, there are a slew of short-ETFS that allow you to profit from declining prices. There are even ETFS that allow you to profit from a 2x leverage of a certain index. While the concept of shorting the markets might be foreign to many buy and hold investors- it really is just about trends. If you believe the trend is up...you go long the investment. If you believe its declining...you short it. As simple as this concept is, I have also spoken to several investors that believe that shorting companies is un-American. How can you root for a companyâ€™s price to decline? In truth, the price of an investment will decline regardless of your participation. The reason that it is declining in value is not because people are shorting the investment, but it is because the fundamentals dictate lower prices.
Rydex and Profunds are two fund families that have several short-ETFS.
In any case, one ETF that I believe should do well in declining oil & stock environment is DUG. I like this play because not only does it profit from declining oil prices, but it also profits from a declining stock market (specifically, declining oil and gas stocks). In fact, DUG has more closely tracked the equities market (on an inverse basis), than it has the oil and gas futures markets.
Full disclosure, I currently own DUG for my personal account. DUG is the ultrashort oil & gas proshares which corresponds to twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas index. Thus, if the index declines in value, you will see about a positive return twice the decline. You can see the companies that make up the index here: http://www.proshares.com/funds/dug.html?Index
I also like the below chart- the price is currently trading at near 52 week lows, and I believe it is forming a base around the $37-39.50 levels.