Brohicious is absolutely right, oil ETFs are NEVER a good long-term buy & hold investment. I could qualify that by saying "unless there's a bull market for oil while the futures market goes into sustained backwardation", but really, that's pretty much the same as saying "NEVER".
You can buy shares outright or trade options, depending on what kind of risk/reward ratio you're looking for, and there's nothing wrong with buying options a year or two out if you want to limit the time decay factor, *as long as* you do it with the intent of selling them after a couple of months at most rather than exercising them when they expire.
Personally I'm sticking with ETFs because I expect a runup to at least 40 but I don't know if it will take days, weeks, or months.
Henli1000's response below is precisely the reason. The continuing inventory buildup has made availability of storage a significant concern, driving storage costs and therefore contango through the roof.
Which to me is all the more reason why production cuts are inevitable. At the January lows, which are being re-tested now, some lower grade oil *literally* couldn't be given away for free. Producers in North Dakota were actually paying pipeline operators 50 cents per barrel to take the stuff off their hands. Yahoo is obnoxious about links, but google "north dakota heavy sour negative prices" and you'll find references to it.
The way I see it, this pretty much forces a coordinated production cut. Too many major produces simply can't afford to keep producing at current levels with sustained prices this low. The report indicates that there's really no realistic way that the glut will be resolved by rising demand anytime in the foreseeable future (we're talking years), which I totally agree with. So the change has to come from the supply side, otherwise oil prices will collapse and even SA will be losing money.
Now, if the producers finally get together to put together a plan to cut output, or rather I should say "when", not "if", they're not going to try to stabilize prices where they are, they're going to aim for at least 50% higher. And financial markets tend to overshoot both ways. So the downside right now is practically nil, while there's a lot of potential upside.
No it's not.
I see ~60 as the upper limit of what's realistically possible for the coming year. And don't misunderstand: I am not predicting that it definitely or probably will get to 60. I'm saying that's about the maximum.
I don't know where you get this idea that "consumption is kicking". It's silly to cite a typical seasonal factor like cold as if it's big news that's going to turn the market around. A run-of-the-mill cold snap doesn't affect long term price trends any more than a warm spell does, and this winter has been nothing out of the ordinary. And I don't know where you get the idea that "traffic is building" in any way that's particularly noteworthy.
Oil has a very low elasticity of demand, and consumption trends are fairly constant and predictable, so it's really all about production. At prices in the 30s, downward pressure on production is significant, but with higher prices, production capacity that has gone idle could very easily be brought back online. In fact, oil production can respond more quickly to increasing prices than to decreasing prices.
I think the equilibrium price is somewhere around 45, and barring drastic changes in the industry prices will keep being attracted to within about 5 bucks of that like a magnet. They can't stay under 40 for very long, and they can't stay over 50 for very long.
I'm planning on getting out of my long position when prices go to somewhere around 40 - 45, and won't short unless it gets to at least 55. You might want to hold until 55 if you like to reach with your trades, but if you hold out for 70, the only kicking will be you kicking yourself for not selling out when you had the chance.
Hmmm, I do recall you saying that buying USO at 20 (even 22, I think) was easy money, and higher prices would come very soon. I stand by what I've said before: USO will NEVER go back to 20, in split-adjusted real dollars. Even 17 is unlikely.
I doubt there are many of them. Nearly all short positions on oil, of any kind, were entered at higher prices. No doubt some of those people *held* their short positions at that level, reasoning that the trade has been working wonders for them and they have plenty of buffer room in green territory, but I doubt more than a handful of people worldwide were stupid enough to open new short positions with prices under 30.
Because the strategy has already succeeded spectacularly and there's plenty of wiggle room to the upside without threatening its success. Oil prices could be 45/bbl or even 50 and shale producers would still face bankruptcy. 95% of shale projects are losing money at 50, and the only ones that are profitable at that price are just barely squeaking by. At prices under 40, the Saudis are unnecessarily depleting their resources for relative chump change and no overall gain, and they know it. Or, to put it in Econ 101 terms, due to the low elasticity of oil demand, prices are currently below equilibrium. They're not making any more money than they would be making at prices $15 higher, they're just squandering their resources.
Also, contrary to what some people seem to believe, the Saudi monarchy does NOT hold a proprietary title deed to OPEC. There comes a point where an alliance of other members could break their dominant position, but I don't see a mutiny happening because the Saudis wouldn't let it get to that point. They have no incentive to isolate themselves within the cartel for the privilege of practically giving away resources that the very viability of the Saudi government depends on at fire sale prices.
The only way OPEC won't cut production is if prices go back up on their own in anticipation that continued prices in the 30 would induce OPEC to cut, as they did at the end of August. And make no mistake about it, that price spike is the ONLY reason OPEC hasn't cut production. So either way, prices are going back up. We won't see 70 any time in the foreseeable future, and even 60 is HIGHLY improbable (though not inconceivable, because trends in financial markets tend to overshoot the fundamentals both ways), but they won't stay under 40 for long, and I doubt they can last under 30 for even two weeks. I'm not saying necessarily that sub-30 prices won't be re-tested, but IF that happens, the bounce will once again come quickly, inevitably, and with a fury.
I said that in the summer, not when it went back under 40 last month. And in fact it had a significant bounce from there. Front month futures went to almost 51, when I had only been targeting 45-50.
I also said, over and over and over, that oil ETFs are NEVER a good long term buy & hold investment instrument. If you're down 30% from when I said that oil was a screaming buy under 40, you weren't paying attention to that part.
In any case, I still think prices under 40 won't last for more than a few months, half a year tops.
UWTI, for a bounce. Then I'll probably switch to UCO. I'm not touching futures contracts or options,because although I think a bounce will come soon, I'm not confident enough about the timing to risk any instruments with expiration dates. What I am confident about is that $30 oil is unsustainable. I'm long at least until it cracks 40. I think ultimately prices will settle somewhere around 45-55. High enough for all OPEC members to have robust profit margins, but too low to revive U.S. high tech projects.
...and after they spent so much money to shoot futures up in a vertical line the first time they went into freefall, too! Such a shame.
This has got to be a dream. I know this doesn't happen in real life. I'm going to stop sleepwalking and go back to bed now, and surely when I wake up for real, I'll see that SPY gapped up in the morning as planned. Then I'll post about the funny dream I had about futures dropping from 2013 to 1997.5 in less than two hours with no sign of turning back up, and we'll all have a chuckle.
U.S. futures reacted by briefly going into freefall. But not to worry, the visible hand quickly swooped in to fix everything. The S&P should gap up nicely tomorrow morning as previously scheduled.
At least China is nominally communist, so there's no hypocrisy in this kind of intervention. It's consistent with the Chinese government's avowed economic philosophy. What's the U.S. government's excuse?