I’m Betting Against Oil
Over the past year, oil (the commodity) has rocketed upwards. In 2008 alone, USO (an ETF that track’s oil’s price) is up 44%. Over the past 52 weeks, this ETF is up around 12%. Oil’s price increase, and the associated increase gas costs, are all over the networks and on television. It seems you can’t watch a half hour news show without someone whining about the rising gas costs.
When the public starts to believe that a certain type of asset has nowhere to go but up, generally it’s a good bet that it’s going down. There is widespread debate over the cause of the increase in the price of oil. Those bullish on oil claim it’s a simple supply/demand issue. The supply of oil is relatively stagnant, but the increase in demand from countries like India and China are rocketing up the price. Furthermore, the decline of the US dollar has also raised the price of oil.
However, many believe that oil speculation has resulted in an increase in the price of oil. People are buying oil as a hedge against both inflation, the weak dollar, and any economic slowdown caused by an increase in oil prices. The volume of trading of the USO ETF more than hints at the public’s raised interest in the price of oil.
I’m no oil expert, so I’m not going to pretend like I have some special insight into the supply/demand fundamentals of oil. However, one thing I consider myself pretty good at is spotting where the ‘dumb’ money is placing its bets. From what I can tell, these investors seem to love the oil trade, since they it seems like oil will only go higher and higher. They keep repeating the same old logic of the raised demand/stagnant supply, which while it merit’s a rise in oil prices, doesn’t mean that oil prices will rise forever.
Disclaimer: Author is short USO
