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Short Term Oil - Update

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January 23, 2009 – Comments (15) | RELATED TICKERS: USO , UCO , OIL

This is an update to the Short Term Oil post that I wrote on Jan 7. For most of the commentary and original thinking on this issue, please read that blog first.

Most of the trends are continuing to develop. As noted when I wrote the post, oil had bounced off $35 and gone to $50. Based on the daily I thought it short term overbought and would go down and retest $35 (which it did). But the weekly trend was still suggesting a longer term rally (on the order of a few weeks at least). The weekly pattern is still setting up and looking better for a rally. This week oil climbed up to $46. There has been a lot of talk in the news about OPEC cuts, Israel and Hamas forming a truce, oversupply, and ultimately contango. Very interesting stuff. Some bullish, some bearish. But the technicals are still indicating a relief rally. How much and how high? Tough to call. But if the S&P does make a breakout to 900 (or even higher) as it can, expect oil to rally with it. 

Click on this link to view a larger version of the chart below.

I think this is still a good entry point to be a part of this rally. I personally am long oil in Caps and in real life in preparation for this move higher. I like USO, OIL, COP, STO. And for something a little more risky / speculative I like UCO, DXO (these are different vehicles that trade on futures in different timeframes, so they do not move the same) or ERX.

As always I would love to hear your comments!

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.

15 Comments – Post Your Own

#1) On January 24, 2009 at 1:46 AM, kaskoosek (63.07) wrote:

Thanks binve

It seems that the one investment I am sure of right now is long run oil prices.

The floor has been established in my oppinin and the down side risk is minimal.

OPEC is not going to allow cheap oil prices. Production cuts will be effective.

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#2) On January 24, 2009 at 8:24 AM, stockcommander (99.00) wrote:

Some oil companies paid quite dearly for licenses to operate some very difficult deep water fields. Others paid just as dearly to get into fields located in politically unstable regions.

With an oil price heading towards $200 - those moves seemed justifiable. If the price of oil keeps hovering around $50, or even stabilizing around $70 some companies may be in big trouble.

Hopefully Big Oil has discovered that pushing the price of oil too far will only bring it crashing down again. The rest of the economy neither can or will support an oil price far above $50 - at least not for some time. This doesn't mean that the price of oil will not jump - but if it does, its highly probable that it will come crashing down again along with the rest of the economy.

An oil price of $50 to $70 is going to make some oil companies a tidy profit - at least those of them that didn't over pay for operating licenses.

So look for companies that didn't go on a shopping spree - some of those that didn't is now in a position to gobble up those who did at a very attractive cost.

 

 

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#3) On January 24, 2009 at 9:33 AM, kaskoosek (63.07) wrote:

stockcommander

I am not touching oil companies.

Just oil ETFs, if oil price goes back to the 30s I will reload.

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#4) On January 24, 2009 at 10:18 AM, amassafortune (29.58) wrote:

Prudhoe Bay BPT is my oil of choice, but I expect to hold it at a loss soon. The U.S. consumes about 25% of the world's oil. Each month, a couple hundred thousand more workers stop commuting due to layoffs. The winter heating season will end in about six weeks, about the same time OPEC cuts are expected to start having their effect. Any oil rally will be weak and short-lived. 

Long term, I agree with your COP pick and also like Petrobras PBR with its huge new finds last year.

Sometime in the March - May timeframe, I think oil will dip below $30 when the glut leads to heavy cheating by cartel members. Russia, Venezuela, and mideastern countries all have budget problems and oil is their easiest solution.

Below $30, I will add to real and CAPS oil positions with the expectation that $147 will be broken again in less than five years and 10-bagger returns in oil are possible in 7-8 years from the $30 level ($30-$200 with div reinvested). 

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#5) On January 24, 2009 at 7:40 PM, binve (< 20) wrote:

kaskoosek, Thanks! Yeah, oil still remains much too oversold in my opinion and momentum is building up for a rally.

stockcommander, Yes there are large number of drillers and rig operators that will not be doing well in the current envrionment. Many of the worlds less efficient deep water rigs cannot make a profit with oil less than $50. At like you talk about above, there are some projects that were never producing but proceeding on the basis of $100 oil (oil sands and stuff). But there are projects that are (were) producing, but only make profit at $50-60 oil. These are the really deep water rigs. Now some of these are still operating but at reduced capacity. The only oil sources that are profitable with oil at its current level ($35-$40) are Middle East and North Africa fields. Venezula, Mexico, Cananda all have (on average) slightly higher extraction costs and don't really make profit until oil reaches $40-50.

All of this plays into long term and short term positioning and where you believe the "stable" price of crude to be. And for the purposes of this discussion it is ultimately irrelevant. In my last post: Short Term Oil, madcow, tasty and I were discussing some long term effects on the price of oil (extraction costs, OPEC, geo-politics, consumption, demand, peak oil, etc.). This has also been discussed on many other places in the blogs too.

The point of this particular post is more on the short term price of crude oil based on daily and weekly technicals. Fundamentals are mentioned but they are going to play a back set because all of the near-term information about oil is in the chart, it is in the price action.

So I believe oil short term is going to make a rally, and my exposure to this is in Oil ETFs and only a couple of the low cost large producers.

If you want to use this technical buy signal as an entry point for some long term investment purchases, that is worth considering. It really depends on your timeframe. However, I am very specfically writing about this technical development / buy signal as A bottom. I am making no comment whatsoever that it might be THE bottom.

I am just clarifying my position :) Thanks for the comments!

amassafortune, similar to the comments I just made above, I don't know where oil will go after this rally. Maybe it goes up to $75 the rest of the year, maybe it goes back down to $35. I literally have no clue (and neither does anyone else).

So let me clarify further. My picks and blogs in this portfolio (binve) regarding short term price action are literally that, short term: several days, a few weeks, maybe a couple of months depending on the strength of the rally. 

After a couple of months, the market is too cloudy for oil. There are a myriad of short and medium term demand and supply issues. No one knows how it will play out. 

But then you zoom out to the long term (5+ years). I have another investing account and Caps account (binv271828) that plays on long term macro trends. I have positions in several oil companies that are also have sizeable alternative energy investment, COP being my favorite. I think this could be a very good entry to add to very long term positions. I think peak oil is real and I think the world will have to face it. So from a long term perspective, I tend to agree with your projections.

But for the purposes of this blog and what the charts above are talking about and the different timeframes for my different investing stances:

Timeframe several days - 4 months (binve mindset):
- This is done completely on the technicals. Right now oil is still very oversold. Picture looks good for a rally. How long and how strong? Don't know yet. But risk / reward at this point favors being long in oil vs. being short in oil.

Timeframe 4 months - 3 years:
???? I have no clue. There is fickle supply and demand, a recession / depression to navigate, alternative energy infrastructure to begin building, willingness of the people to support it, .....

Timeframe 3-10 years (binv271828 mindset):
- Possibility A, real advancment in alternative energy:
Oil up a lot (there is no way to ween ourselves completly off oil in this timeframe)
Alternative energy up a LOT
- Possibility B, no real advancments in alternative energy:
Oil up a LOT

I hope this clarifies the post. Thanks for the comments!

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#6) On January 25, 2009 at 5:33 PM, BigFatBEAR (29.27) wrote:

Nice update, binve.

I'm with kaskoosek - USO seems to have found decent short-term support around 28 to 29. I've been slowly and timidly DCA'ing into it with my real portfolio, and may look to buy a tad more should it drop past this support.

I really like COP's growing div, and discount to peers. However, I think the Lukoil investment / 20 billion in debt is too huge a liability to ignore in this market climate. (See TMFEldrehad's recent post on possible stock dilution.) I do find XOM's balance sheet much more attractive, but am not quite sure it merits the price premium.

Safe and prudent investing to all. 

-BFB

PS. ERX and other ultra ETFs should be treated as VERY short-term trades only - ie, a tiny position for a day or two when you're very certain of a price surge. The decay of these vehicles (not to mention lack of history) are extremely unattractive to me!

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#7) On January 26, 2009 at 9:15 AM, binve (< 20) wrote:

BigFatBEAR, Thanks man! Yeah, most of the near term trending applies to the technicals of crude oil, and not so much the producers. I just added a few of the producers that also had strong charts right now that will probably most directly benefit from an oil rally.

I like the short term chart of COP. I also like it very long term (5+ years). But like I was saying above, I have no idea where oil or the producers will be between several months and a couple of years from now.

And very good point on the ultra ETFs. I have said in my blogs and others blogs as well what you say above. These can really help your returns during trending markets. But they really lose their effectivness over the long term. There is lots of risk, so use them as short term trading vehicles only, not as investments.

Thanks!

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#8) On January 26, 2009 at 1:53 PM, anchak (99.84) wrote:

99th percentile my friend ... :)

 

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#9) On January 26, 2009 at 2:02 PM, binve (< 20) wrote:

Thanks, man. Same to you! ... Hopefully we can hang on to it :)

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#10) On January 26, 2009 at 2:08 PM, GoodVibe4Ever (< 20) wrote:

To add to the conversation and not to step over binv, here are some of my charts on oil.

Possible scenario:

 Oil

Weekly rally ahead:

 Oil Weekly

GoodVibe

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#11) On January 26, 2009 at 2:25 PM, binve (< 20) wrote:

GoodVibe, Thanks for the confirmation! No worries about stepping over anything, you are welcome to add anything you see fit to any of my posts. Thanks!

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#12) On January 26, 2009 at 3:40 PM, madcowmonkey (< 20) wrote:

I must be getting old...I can't read anything you put in there, but I can see the upswing! Sometimes reading is overrated:)

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#13) On January 26, 2009 at 3:48 PM, GoodVibe4Ever (< 20) wrote:

Mad,

Large

Large

You can always click the charts, then click all sizes on the page's left corner. It will give you a better view. Best!

GoodVibe

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#14) On January 28, 2009 at 1:08 PM, Vet67to82 (< 20) wrote:

Thanks for your compliment on my blog, 

  I read both your blogs and they're great.  I use charting software myself, usually only after I've done the fundamental analysis first.  However, doing chart searchs always brings up new companies, sending me back to the fundamentals search, then, if the company, industry, sector passes muster -- it is all linked, I do an intensive chart analysis on the companies whose fundamentals I like.    I gave you a recommendadion on each of your blogs ... I enjoyed your disclaimer, and I'm adding you to my favorites as well.  You've got good, must read info.  Keep up the good work. 

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#15) On January 28, 2009 at 1:15 PM, binve (< 20) wrote:

Vet, Thanks! I really appreciate that!

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