Looks Like It's Time to Buy Oil

Crude oil is down over $100 per barrel from its highs of this past summer. Oil traded at around $150 per barrel and gas prices rose to over $4 a gallon. Oil currently trades at around $47 a barrel and gas prices are well under $2 dollars a gallon. The precipitous decline in the price of oil can be attributed to the decline in oil speculators and falling worldwide demand due to the slowing economy.

As oil prices continue to drop this may represent an attractive buying opportunity in energy related equities. Oil should bottom at around $40 a barrel. The fundamentals are in place however for oil to rise over the long term. The current cheap oil environment hurts the development of alternative energy projects. The oil market should rebound at the start of an economic recovery or any significant production cuts from OPEC. Demand for crude oil will return with economic stability and increasing the money supply should produce an inflationary environment that leads to a rise in commodity prices.

One of the easiest ways to play an expected rise in oil is to buy the United States Oil ETF (USO). USO is an exchange traded fund that directly tracks the price of crude oil. The USO is currently trading at a price of $38.50 which is very close to its all time low.

Another option is the iPath S&P Crude Oil Total Return Index (OIL) which tracks crude oil futures contracts. OIL is currently trading near its all time low at $27.52.

You could always purchase one of the major integrated oil companies like Exxon (XOM) or Conoco Phillips (COP). Exxon currently trades at $77 a share and Conoco Phillips trades around $50. These stocks still have room to drop further. Exxon looks like a buy closer to $60 and Concoco in the $40's.

Lately television pundits and analysts have stated that oil may go as low as $25 per barrel. No one knows the exact bottom for the oil market. But if oil does hit $25 a barrel; oil should rebound off that level rather quickly. Many of the same people touting oil at $25 were saying that oil at $200 a barrel was just around the corner.

Comments

[Ishortyou:]

I wonder why they are some still insisting on the oil push up business, besides having money inveted in it, isnt time already to make some changes towards new technologies and forget about oil for good?

2008 Dec 11 07:16 AM

[Enough Wealth:]

I think oil has great potential as a long term commodity investment, and the current global meltdown will provide a once-in-a-lifetime buying opportunity. However, I think I'll wait until oil has stopped falling and has started to show some sustained gains again - say up from $40 to $50, or from $30 to $40. Buying while it's still within a major downtrend and trying to pick a bottom is too high risk for me ;)

2008 Dec 11 07:25 AM

[Barry Robbins:]

If you think oil is moving up from here, DXO is a double-long oil ETF. ERY is a 3x Energy Bear ETF.

2008 Dec 11 08:06 AM

[homerbart:]

write puts on the majors out of the money and collect fat paydays without the hassle of stock ownership

2008 Dec 11 08:44 AM

[Skip Olinger:]

It would be helpful and add to your credibility if you would provide support or explanations for your numbers. It sounds to me like you are making them up based on your gut feel. How do you know COP is a buy in the $40's? This was not a very useful article

2008 Dec 11 09:00 AM

[SJD:]

Don't rely totally on article submissions to provide all the info you feel you need. Look at the fundamentals and the charts yourself and take the analysis to whatever level of detail appropriate for you.

2008 Dec 11 10:01 AM

[Mmarrkk:]

Like selling EOG Apr 09 $40 Puts for $2.50? Stock at $75 currently. If the world fell apart, you would be forced to buy EOG at $40, minus the proceeds of the put for an effective price of $37.50, a drop of 50% from its current price and a drop of 74% from its 52-week high of $145. If the world doesn't fall apart and EOG stays above $40, you make $250 per contract.

Did similar with CHK Apr 09 $7.50 Puts for $1.25. If forced, you'd have a buy-in price of $6.25 for CHK.

2008 Dec 11 10:32 AM

[nym:]

Why do we get to rate the comments, but not the articles?

2008 Dec 11 10:39 AM

[Dan S1:]

I believe the bottom is not in yet for the petroleum energy complex. Many people thought $40.50 was the major low, but it is not according to my technical analysis. However, we can still rally up to $55.98 and crude oil will still be in it's major downtrend.

Continue to sell strong rallies.

2008 Dec 11 02:46 PM

[Ticker0112358:]

Your hypothesis sounds like it's following YOUR trading pattern, rather then providing any credible evidence.

Articles like this should be rated, for which I would rate very low. No information whatsoever to back up your claims.

2008 Dec 11 08:53 PM

[Panda:]

Mmarrkk -
Where does one look to find deals like that on a regular basis?
It's the smartest thing I have ever seen in a comment.
Do you have a screen for that? Some web service?
Happy holidays, and I hope to hear from you.


On Dec 11 10:32 AM Mmarrkk wrote:

> Like selling EOG Apr 09 $40 Puts for $2.50? Stock at $75 currently.
> If the world fell apart, you would be forced to buy EOG at $40, minus
> the proceeds of the put for an effective price of $37.50, a drop
> of 50% from its current price and a drop of 74% from its 52-week
> high of $145. If the world doesn't fall apart and EOG stays above
> $40, you make $250 per contract.
>
> Did similar with CHK Apr 09 $7.50 Puts for $1.25. If forced, you'd
> have a buy-in price of $6.25 for CHK.

2008 Dec 12 04:00 AM

[pockyclips ...:]

Agreed. No more oil until a sustained $10 increase for a week.


On Dec 11 07:25 AM Enough Wealth wrote:

> I think oil has great potential as a long term commodity investment,
> and the current global meltdown will provide a once-in-a-lifetime
> buying opportunity. However, I think I'll wait until oil has stopped
> falling and has started to show some sustained gains again - say
> up from $40 to $50, or from $30 to $40. Buying while it's still within
> a major downtrend and trying to pick a bottom is too high risk for
> me ;)

2008 Dec 12 08:53 AM

[Chris B:]

It appears that there are no fundamentals for oil.

The rise of Chinese and Indian demand was the explanation for $140 oil, but those countries are still in place, and still growing, at $45. No technological breakthrough has been developed in the past 6 mos that makes oil easier to produce. Demand destruction from the recession means that worldwide demand might be flat in 2008-09, at the same levels that were used to justify $200 oil predictions.

So when someone tells you a reason why it's a sure thing that oil should go for $25, or $100, keep in mind that reasoning doesn't apply to oil, or many commodities. Chaos theory sounds like a more reasonable explanation than anything I've heard in the last year of articles. Invest, or should I say gamble, accordingly.

2008 Dec 12 09:46 AM

[Mmarrkk:]

Panda: no screen or anything, just a lot of research. I start with companies I know a lot about, like EOG and CHK. I have a good feeling for what will move their price over a period of time and what I think is a totally outrageous entry price (like EOG at $40). Then you have to find a stock with some volatility so that the option premiums make this worth the trade. Just takes time.

I got this from a few traders that I've read information on. Also, Phil Davis (posts on SA often) has some variations on this approach. I don't always agree with Phil's editorials, but his option trades are great!

2008 Dec 12 10:42 AM

[budbud:]

Oil is still going to be necessary, it just should not be AS necessary, because it is not renewable. It should be removed from the picture for ground transportation and electricity production as much as possible. It is going to be difficult to create an electric passenger airplane however, there is too much energy and conveience in a liquid form.

So that being said, still a good long term investment when bottomed out; the problem is having Oil companies, which are also fueling convenience companies, use their infrastructure for alternate forms of energy such as electric recharging, fuel cells, etcetera, which, as you may have noticed over the past 8 years, they are not likely to go into quietly. Exxon et al need to realize this, they cannot continue business as usual.

2008 Dec 12 06:21 PM

[Lamont B Du...:]

China and India were convenient straw men, used to cover up the fact that an obsessive, nearly paranoid deregulatory culture that espoused throwing the baby out with the bathwater as a reasonable policy allowed rampant, manipulative speculation to drive crude prices to levels that did not reflect market realities. If we'd been told the truth about why crude was that high, the citizenry would have stormed the White House with pitchforks. (No torches though, who could afford the kero?)

If you accept the tranparently obvious lies the White House was telling about $147/bbl crude, it's hard to make sense of that market. If you look at the market with an eye toward what makes sense, and ignore ridiculous explanations, regardless of the source, things might seem a bit more rational.


"The rise of Chinese and Indian demand was the explanation for $140
oil, but those countries are still in place, and still growing, at $45... Demand destruction from the recession means that worldwide demand might be flat in 2008-09, at the same levels that were used to justify $200 oil predictions.

So when someone tells you a reason why it's a sure thing that oil should go for $25, or $100, keep in mind that reasoning doesn't apply to oil, or many commodities."

2008 Dec 15 07:40 PM

[surrealist:]

What was the purpose of the original write-up? The title says "Looks like its time to buy oil". Why isn't any collaborating data provided? Where are the supply and demand numbers? $140, $40 who arrives at these numbers? Why do we keep trying to use history as an indicator of future?

2008 Dec 16 02:58 AM

[Snoop-Diggi...:]

On Dec 16 02:58 AM surrealist wrote:

> What was the purpose of the original write-up? The title says "Looks
> like its time to buy oil". Why isn't any collaborating data provided?

Collaborating datd is the fact that even in the "greenest" of circumstances, the world will continue to run on oil for at least the next 20 years. Oil is not far from an historic low.

Buy low, sell....well, higher.

Jan 23 07:30 PM