I’ve personally had a pretty rough year so far, mainly because I’ve been long in this treacherous market. One bet though that I was spot on about was shorting oil. There was a huge commodities bubble that began to burst in the late summer. Oil, in particular, has fallen over 65% from its highs.
Now, may be time though to pile in and start going long oil. Currently, I’m buying oil and will likely begin scaling out of my position once crude hits the $90-$100 range. Here’s why I think the price of crude will rise over the next couple of years.
1. I believe the market has over-reacted due to perceptions of falling demand. Yes, there will be a recession and yes it will decrease the demand for oil. But causing it to drop like it has is ridiculous. People will still drive their cars no matter what.
2. Whenever a bubble bursts, it tends to overshoot. Just like dot com companies were overvalued and then undervalued, so has crude oil.
3. I see few supply alternatives in the near future. I’m betting that solar and other technologies are still far off in development. Furthermore, the democrats won’t likely push for much more drilling, which means the supply of oil/natural gas won’t be expanded that much and they will not push nuclear power as much. Relying on the future hope of solar power means more dependence on oil than ever.
4. Furthermore, I bet the democrats won’t reduce hte demand for oil that much. While they may be tempted to levy taxes on gasoline, these will prove to be widely unpopular, especially during a recession. Thus, we’ll find ourselves in the same situation we were in June.
There’s two ways to play the oil trade. One is buy buying the USO ETF, which I’m long currently. If you have a lot of gamble in you, consider the double leveraged UCO ETF, which does the daily 200% change of crude oil. I’ll probably start buying this ETF in a month or so. Right now, it’s still a bit too thinly traded for my tastes.
Disclaimer: Author long USO.