Marc Faber, Jim Rogers and Boone Pickens - Bullish on Oil 36 comments
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Three of the best known commodity investors are bullish on oil at this very moment. They all have talked about oil recently and it seems that both Marc Faber and Jim Rogers are holding oil, and Boone Pickens while still licking his wounds from the losses at his BP Capital hedge fund is talking oil up even if he is staying on the sidelines. Boone Pickens said this week that "oil prices in the 40 a dollar barrel are not going to last much longer."
Marc Faber said to CNBC that "I would say, the long-term demand for oil is there. The supply won't be there. So, long-term, I think the price will be much higher than it is today" while Jim Rogers said something very similar, "Oil Reserves are dropping 7% a year and these drop in reserves will cause serious supply problems in the near future." Jim Rogers concludes "Oil will make a big comeback."
Long term, they are all optimistic about rising oil prices and they have been quite accurate in their long term projections over the years. But with this crazy Contango and steep Forward Curve is very, very expensive to hold oil and wait for a rise. The market is just too expensive to Buy and Hold.
So the big question is: Is oil going to rise so much that it pays this huge Contango or should we short forward oil and get paid big time just for waiting?
Disclosure: no positions
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This article has 36 comments:
The conundrum with oil that I have is that as the price goes up world economies go down and the price will follow. The bullish aspect is that people have short memories and they will not pursue, as President Bush stated that we should, in his State of the Union Address in 2001and later, which Congress ignored and still does, alternative sources of energy.
Hopefully when the politically inspired emotionally driven Greening and Global Warming Manias pass, the country will get serious about energy and not just talk. But I doubt that the Obama/Hillary Administration, with their emphasis on political donations and reelection as is Congress, will do anything substantive.
I hope I am wrong but I won't put my money on it.
One thing the US needs to do is build more Waste to Energy (WtE) plants to generate electricity, which will then tie in with Pickens Plan, displacing the use of natural gas for electricity generation so it can be used to fuel our vehicles.
WtE is using an EPA-recognized renewable fuel that we are currently throwing away, will increase recycling, create jobs and bolster our economy. The US has the ability (the fuel) to build over 600 new power plants and employ hundreds of thousands of people. The plants should be built at existing landfill sites, because the fuel transportation is already established.
Companies like Covanta and Wheelabrator build and operate 90 or so plants currently - the designs already exist and are proven. This is one of those "shovel-ready" projects that should be included in BHO's stimulus package.
See my blog entry "More about Waste-to-Energy (WtE) " from 12.03.08 for more information.
Until there is an alternative and a viable one which is not even in sight, oil will continue to be under the pressures of the day.
On Jan 11 09:09 AM PrudentMan, CFA wrote:
> Self-serving statements by "experts" mean nothing to me and have
> not for the fifty years I have been an investment professional, although
> I respect these individual opinions.
>
> The conundrum with oil that I have is that as the price goes up world
> economies go down and the price will follow. The bullish aspect is
> that people have short memories and they will not pursue, as President
> Bush stated that we should, in his State of the Union Address in
> 2001and later, which Congress ignored and still does, alternative
> sources of energy.
>
> Hopefully when the politically inspired emotionally driven Greening
> and Global Warming Manias pass, the country will get serious about
> energy and not just talk. But I doubt that the Obama/Hillary Administration,
> with their emphasis on political donations and reelection as is Congress,
> will do anything substantive.
>
> I hope I am wrong but I won't put my money on it.
Alternative energy is relatively capital inefficient at this point with oil where it is. I'm all for it from a CO2 perspective, but I don't think the government should be providing any more subsidies than it already is. There's already plenty of capital chasing that sector just because of the presumed government support. It's time these industries stand on their own rather than the government crowding out more efficient uses of resources.
The problem is that 40 dollars a barrel (or less) is not sustainable for any period of time without geopolitical consequences. Russia simply turned off the spigot and demanded higher prices. What will Iran do?
One way or another we will get back to the 75-85 dollar a barrel range in 2009. The sooner the better.
It's a trap for retail investors who cannot venture into the futures trading and do not understand the monthly roll of future contracts.
Right now, oil of March expiration stands at 46.07, while oil of February expiration stands only at 40.83. If the USO has to roll from the Feb to Mar oil today, it will have to pay a ghastly 14-15% premium. Now repeat that 12 time during a year, you can see how much left will be there for USO holders.
At this point, I would rather invest in oil related stocks than this USO trap.
Kodiakaa: Please provide a link to your post on "More about Waste-to-Energy". I googled for it and couldn't find it. (I think WtE is a terrific technology and I'm sorry Obama hasn't endorsed it. Perhaps because it's not 100% green?)
I have been tracking USO and it seems like there is an opportunity to trade it (by buying right before options expiration Fridays and selling 1-2 days later).
On Jan 11 03:00 PM mkreisel wrote:
> I'm bullish on oil for the long term, but I'm utterly bearish on
> USO.
>
> It's a trap for retail investors who cannot venture into the futures
> trading and do not understand the monthly roll of future contracts.
>
>
> Right now, oil of March expiration stands at 46.07, while oil of
> February expiration stands only at 40.83. If the USO has to roll
> from the Feb to Mar oil today, it will have to pay a ghastly 14-15%
> premium. Now repeat that 12 time during a year, you can see how much
> left will be there for USO holders.
>
> At this point, I would rather invest in oil related stocks than this
> USO trap.
>
When the economy starts to show signs the worst is over may be a time to begin slowly building positions. IMHO its still a little early.
At some point economic activity will start to pick up, and that might be the time to get in.
Does USL have a lesser contango problem than USO?
go against the crowd, be patient and do not use leverage or exotic stuff like oil futures, uso or the likes
If you can time the jump in crude, by all means jump into USO right before the jump.
This is why you see many (smart) companies (hedge funds, commodity-related companies, etc.) buying large amounts of oil on the spot market and storing it. They are essentially doing the exact opposite of the aforementioned oil ETFs. They are buying low (on the spot market) and then will SELL a futures contract at a higher price - using their oil "stash" to cover the contract. As the settlement date nears, they will usually close the contract out by buying it back at a lower price - therefore never having to move their actual inventory of oil. As long as the profit they've made on the contract buy/sell is more than what they're paying for storage of the oil, they've done well. They can (and will) continue to do this on a monthly basis. Unfortunately, this isn't an accessible strategy for your everyday investor (idea for a new fund?). Not to mention, we're running out of storage space!
On Jan 12 11:47 AM L Boyd wrote:
> @riskreturnoptimizer - re: 'this concept of roll'. ETFs and ETN's
> that track commodities such as oil (or copper, orange juice, etc)
> usually do so by continually buying front month futures contracts.
> Before the front month contract gets to its settlement date, the
> fund will close out its position and buy the next front month contract.
> In periods of extreme contango (now) this is a very unprofitable
> strategy. The fund is essentially buying at a high price, and as
> the contract nears its settlement date the contract has (probably)
> traded much lower, at which point the fund sells for a lower price
> than it paid. In an effort to provide continual exposure to the
> price of oil, the fund is buying high and selling low on a monthly
> basis.
>
> This is why you see many (smart) companies (hedge funds, commodity-related
> companies, etc.) buying large amounts of oil on the spot market and
> storing it. They are essentially doing the exact opposite of the
> aforementioned oil ETFs. They are buying low (on the spot market)
> and then will SELL a futures contract at a higher price - using their
> oil "stash" to cover the contract. As the settlement date nears,
> they will usually close the contract out by buying it back at a lower
> price - therefore never having to move their actual inventory of
> oil. As long as the profit they've made on the contract buy/sell
> is more than what they're paying for storage of the oil, they've
> done well. They can (and will) continue to do this on a monthly
> basis. Unfortunately, this isn't an accessible strategy for your
> everyday investor (idea for a new fund?). Not to mention, we're
> running out of storage space!
>>>I wonder if the oil price is being manipulated down (by the gov't.) to clip Chavez's wings. If so, it may not bounce up as soon as the bulls expect.<<<
You would probably enjoying reading the "The Oil Card" by James Norman. The entire book describes in detail two interesting hypothesis's:
1) The US engineered the drop in oil prices in the mid-1980's to bankrupt the USSR.
2) The US manipulated oil prices upwards recently to stunt Chinese economic growth.
I don't agree with the author, but it was an interesting read.
On Jan 11 03:00 PM mkreisel wrote:
> I'm bullish on oil for the long term, but I'm utterly bearish on
> USO.
>
> It's a trap for retail investors who cannot venture into the futures
> trading and do not understand the monthly roll of future contracts.
>
>
> Right now, oil of March expiration stands at 46.07, while oil of
> February expiration stands only at 40.83. If the USO has to roll
> from the Feb to Mar oil today, it will have to pay a ghastly 14-15%
> premium. Now repeat that 12 time during a year, you can see how much
> left will be there for USO holders.
>
> At this point, I would rather invest in oil related stocks than this
> USO trap.
>
On Jan 11 11:32 AM fran wrote:
> how about reducing our diesel use/demand with USA sourced NG as a
> starter?
> of the matter is that the decline in price is primarily due to a
> rapid increase in the supply of many alternatives to crude oil.
> The decline is not temporary.
>
> Crude oil is being DISPLACED by the other energy sources which are
> rapidly arriving on the market.
I do not disagree that crude will eventually be displaced to a large degree -- coal was king in the late 1800s -- but the timing is the question. While the factors you cite are correct, they cannot satiate the demand for oil that exists in the west and in China and India. Until the displacement comes, opportunities exist to buy this most basic staple of the energy sector and its producers at decent prices.
> I have posted this comment before and I will continue to post it.
Yeah, and it's been rebutted, line by line, by at least several bloggers I've read. I'd appreciate your dealing with their rebuttals rather than just re-posting stuff we've already read.
On Jan 12 12:05 PM Michael66 wrote:
> I have posted this comment before and I will continue to post it.
>
>
> The oil companies and the speculators want us to believe the recent
> decrease in crude oil prices is simply due to a temporary decrease
> in demand. They want us to believe things will soon return to normal
> and the oil price will again increase.
>
> The decrease in the price of crude oil is not temporary. The fact
> of the matter is that the decline in price is primarily due to a
> rapid increase in the supply of many alternatives to crude oil. The
> decline is not temporary.
>
> Crude oil is being DISPLACED by the other energy sources which are
> rapidly arriving on the market. The DISPLACEMENT of demand for crude
> oil is occurring much more rapidly than the oil companies and the
> speculaors imagined.
>
> WHY CRUDE OIL PRICES WILL DECLINE:
> Recently OPEC reduced crude oil production twice over just a few
> months. There are five wars going on in Liberia, Mexico, Gaza, Iraq
> and Afghandistan. A year ago these events would have spiked the price
> of crude oil by at least $50.00 per barrel. Recently, oil price declined
> by a record daily amount.
>
> There are several reasons the price of oil is decreasing in the face
> of so much news. These reasons are:
>
> 1. New oil has been found in Canada, Montana, North & South Dakota
> and in the ocean near Brazil. Each of these oil fields has more oil
> than Arabia. Canada is constructing several pipelines to deliver
> the oil to the US and to their west coast for shipment to Asia.<br/>
>
> 2. New natural gas has been found in Pennsylvania and West Virginia.
> This is the largest find in North America. Currently the total US
> gas production is 30 trillion cubic feet per day. The Pennsylvania/West
> Virginia gas field is expected to produce 50 trillion cubic feet
> per day or more. America’s gas production will soon triple.
>
> 3. New methods of injecting CO2 and surfactants into oil wells is
> being used to double their output.
>
> 4. Bio fuel is being produced from many plants and algae and production
> is beginning to reach critical mass. The production potential per
> acre in some cases is astounding. Many countries are racing to produce
> bio fuels.
>
> 5. Virtually every restaurant in the US and all food processing plants
> are now selling their used oil to bio-diesel producers. Every pork,
> cattle, turkey and chicken processing plant is selling their fat
> to bio-diesel producers. One pork processing plant in Oklahoma has
> an on premises bio diesel plant and is producing 30,000 gallons of
> bio-diesel per day from pork fat.
>
> 6. There are 99 nuclear reactors in various stages of construction
> around the world at this time. Several hundred more are expected
> to be built in the future. Much of the energy they produce will displace
> oil.
>
> 7. Every company in any form of transportaion business is replacing
> older equipment such as trucks, airplanes, train engines, ships,
> etc. with new more fuel efficient equipment. Airlines and railway
> companies are experiencing 20% to 25% better fuel econony with the
> new equipment.
>
> Airlines are flying airplanes with bio-fuel. They are finding the
> bio-fuel is cleaner and performs better than jet fuel. The US Air
> Force has been told to switch all its jets to bio fuels as soon as
> practical.
>
> 8. Cities and counties throughout the US are selling the rights to
> capture methane gas from landfills. This is a huge source of gas
> available at very little cost or risk. The gas is displacing crude
> oil.
>
> 9. Coal is being transformed into a clean burning liquid fuel. The
> CO2 produced as a byproduct is sold to oil companies for injection
> into oil wells.
>
> 10. Solar, wind and ocean energy is displacing oil as an energy source.
> Three new wind turbines are being erected every day in the US.<br/>
>
> 11. Methyl hydrates will one day soon be an enormous sourch of energy.
> There is more methyl hydrates deposits than ALL other fossil fuels
> in the world combined. The test wells to extract methyl hydrates
> are producing much more gas than anticipated. The researchers are
> quite excited about their progress so far.
>
> Each of the above by itself will not make a large difference in the
> price of crude oil but the sum of all of them together is world changing.
> The important thing is that OPEC and the speculators no longer have
> the ability to control oil prices as they have in the past.
if you look at any reasonable period of performance of USO it closely tracks the performance of spot oil. that's exactly what it is intended to do. if price disparity of different contract months was an issue that could not be managed, you would see it in the performance of the fund. that hasn't been the case.
if i'm missing something here feel free to set me straight.
On Jan 11 03:00 PM mkreisel wrote:
> I'm bullish on oil for the long term, but I'm utterly bearish on
> USO.
>
> It's a trap for retail investors who cannot venture into the futures
> trading and do not understand the monthly roll of future contracts.
>
>
> Right now, oil of March expiration stands at 46.07, while oil of
> February expiration stands only at 40.83. If the USO has to roll
> from the Feb to Mar oil today, it will have to pay a ghastly 14-15%
> premium. Now repeat that 12 time during a year, you can see how much
> left will be there for USO holders.
>
> At this point, I would rather invest in oil related stocks than this
> USO trap.
>
However, you will soon find out that despite the strong deflationary forces currently at work the world will look back at 2008-2009-(2010?) as the LAST period of really cheap oil. Smart major producers will get out and buy cheap oil resorces and assets in politically secure places at bargain prices over the coming months and anyone following them will do very very well over the next 10-20 years.
oil will be replaced as source of energy , but only gradually and over a long period of time. high prices are the ONLY real cure for high prices in a market driven economy. my hope is that obama! will direct vast parts of his keynesian infrastructure spending towards cutting the dependence on oil and no, nuclear can't and won't do it for any extended period of time and is the most dangerous technology ever developed - right next to genetic manipulations.
Was that 7% statistic compiled before the bottom fell out of demand? Anyway it is realy nice of Rogers, Faber and Pickens to be constantly talking their book in the media for the benefit of us 'little' investors.
"But with this crazy Contango and steep Forward Curve is very, very expensive to hold oil and wait for a rise. The market is just too expensive to Buy and Hold."
Personally, i am a fan of USO ETF as a way to invest into an oil rise without too much risk. Lots of trading volume and seems to follow oil pretty well.
www.unitedstatesoilfun.../
Thanks,
Mac