12 Reasons I'm Still Buying Oil

Gold has skyrocketed and oil has dropped like a rock in the last few months, in case you were in a closet.

Here's why I am long oil (USO) and am getting longer on dips:

1. Oil has come down about almost 80% from its high. (I understand that there was overbuying because JP Morgan (JPM) was highly leveraged and was technically manipulating the market, but it worked for a reason.)
2. Oil is a commodity just like Gold and Silver, making it an international currency.
3. The Federal Reserve Bank is leveraged 75:1.
4. The U.S. government is 53 trillion in debt, according to our former comptroller.
5. The US GDP ranks 177 out of 181 countries.
6. The US government currently spends all of the $4 trillion it makes annually and more, making the $53 trillion unlikely to get paid anytime soon.
7. The US used to be the reserve currency of the world. Right now there isn't one. People are confused as to where they can put their money, and the US is currently being used because the next best thing hasn't been figured out yet. It certainly won't be the euro or the pound. They are both in similar positions.
8. Oil is an international currency which will hedge against the dollar, in the case of the dollar devaluation the US government is currently setting up.
9. Oil is consumed, whereas every ounce of gold ever mined is still on earth (unless it was forcibly changed into something else, which is unlikely).
10. Even if the demand for oil doesn't come back it is not feasible to extract it using more expensive methods at these prices, which means that production will be decreasing more and more as it gets cheaper.
11. The general consensus is that it's too cheap right now. How do we know this? Instead of selling oil to the general market, the new trend is to rent tankers and store it. It is relatively cheap to rent a tanker compared to how much can be made by holding it until it is at more reasonable levels.
12. The only real threat to oil is a renewable energy source that will replace it or a cleaner burning method. This is highly possible, but the widespread application of it will not happen anytime soon. Even in the case of a replacement found for cars, it is used for many more things other than gasoline. It is used for plastics and other similar consumer products. It is hard to find something now that doesn't have some plastic in it.

Overall, oil could definitely go lower, to a certain point. But even if the market dies and the dow hits 0, this will negatively affect the dollar, which will then spike oil. But I am in it for the long haul, and am willing to wait it out. I was right about gold (GLD) and silver (SLV), and see oil as the next logical move because gold and silver are starting to get pricey. If I was going to invest in gold or silver it would be physically. I can't exactly store oil - otherwise I would.

There are those that would criticize this play on the basis that any commodity is eligible for this argument. Copper is an example. You might be right. So get any commodity you like. I like oil, for the reasons above.

Disclosure: Long USO.

Comments

[Sean Privitera:]

Tater:

Apparently you haven't seen the 60 minutes interview on Oil. It was stated in the interview that JP Morgan was one of the largest holders of oil when it was at the astronomic price levels. This doesn't mean that it was necessarily JP Morgan the company, it could have been JP Morgan on the part of investors through JPM ETF holdings.

More info on the $53 Trillion - Just Google David Walker for even more info, he's been on just about every news channel talking about this...... www.cnn.com/2007/US/03...

BC818: Other Oil ETF's are fine, but USO, USL and OIL are the actual commodity and OIH is the equity. I have some BP too for equity stake (Jim Cramer really likes BP...and I use their gas...or my gas since I'm an equity holder :) ).

Feb 23 01:10 PM

[henarl:]

Oil is a great long term investment for all of the reasons enumerated above. Trading oil short term is a whole lot trickier tho as hedge fund holdings, contango, weather, wars, etc. have a much greater effect short term than fundamental supply and demand considerations.

Feb 23 02:39 PM

[jarco:]

Best bets are domestic E&P's. They own the oil & NG produced. Assets in the ground; not foreign owned, produced, or controlled.

Refinery output is relatively fixed both in terms of capacity and product mix. With less consumption of gasoline, for example, one must still produce it in order to satisfy needs for distilite (#2 fuel oil, jet fuel whose comsumption is less vulnerable)

Feb 23 02:43 PM

[Miner49er:]

Roledex: I just printed off 1000 bucks to put into mutual fund ienax, (oil mutual fund) cheapest ever! Wish I hadn't run out of printer paper.(smile)
Also: come for the dividends, stay for the capital gains!..
Bp 8%, evep 22%, cop 4% --and they're all paying them. Companies with proper hedges and diversified programs are making it just fine.
Bp recently said that it would cut exploration before the dividend--they're committed to real payback. Much more risk to the upside than downside, IMO. A believer in Peak Oil. Disclaimer: own BP and EVEP.

Feb 23 03:38 PM

[sheridan:]

Why would this author buy USO over USL hasn't he done his homework on their purchase strategy- USO is horribly subject to contango.
Seems like he's trying to convince himself he's right- if he were worth listening to he'd list 12 reasons why it could go lower as well.

Feb 23 03:53 PM

[Sean Privitera:]

I'm all ears if you want to list 'em.

USL has done better over the last month than USO, and I would recommend that also but either are good plays.

Feb 23 05:00 PM

[2contango:]

Yes, there will continue to be a demand for oil, but demand is only one factor in oil price predictions. I remember those who predicted 20 years ago that computer prices would skyrocket as demand grew. In today's market, it's more likely that oil prices will return to their $10 to $15 per barrel range.

Feb 23 05:17 PM

[Sean Privitera:]

I also like UGA - Gasolene ETF

Feb 23 05:17 PM

[@TexasER:]

I shorted oil & gas over the summer to play the bubble. But that was because I knew that folks couldn’t afford to pay $150 – demand HAD to fall and people would cut consumption. Closed that position out.

I am tempted to go long now, but can’t quite shake a nagging feeling. Nothing HAS to make demand go back up. But OPEC does HAVE to keep pumping regardless of the price. And as the price goes lower, they have to pump more to cover their costs and maintain political control.

So yes, over 10 years oil is almost a sure thing, for all the reasons suggested above. Over 0-3 years we could see much lower.

And still, I’m tempted.

Feb 23 05:59 PM

[thotdoc:]

Ok. How do you invest in oil? I tried and got killed with contango. USL is better than USO, but you are still dealing with contango,,,,just less virile.

I could use some good advice.

What is a pure play oil without contango?

Thanks,

G


On Feb 22 12:20 PM longoil wrote:

> Oil is a good investment for the next 40 to 50 years for the simple
> reason that there is no substitute(s) that can replace all of oil's
> thousands of current applications.
>
> NG powered, hybrid, PHEV and fully electric cars are feasible solutions
> but are currently deployed on a very small scale.
>
> Wind and solar power for generating electricty also has great potential,
> but accounts for less than 5% of the world's electric power.
>
> On the other hand, there are no substitutes for oil in the following
> applications:
>
> 1) Petrochemicals are used in thousands of goods like plastics, pesticides,
> medicines, etc. There is no substitute for the petrochemcial industry.
> Derivatves from coal and sugar can only be used in a handful of applications..
>
>
> 2) Lubrication is another key use of oil and no viable substitute
> exists.
>
> 3) Shipping is dominated by diesel powered vessels. The alternatives
> are sails, coal and nuclear. Each has its own major drawbacks. <br/>
>
> 4) Aircraft can only be powered by kerosine. Yes, Richard Branson
> promoted a trial flight with kerosine thinned with biofuels. This
> is more of a publicity stunt rather than a realistic solution. Biofuels
> on their own cannot be used in aviation.

Feb 23 09:03 PM

[BillV:]

I like what Sean has to say and his thinking. Let's look at it this way: If your wife told you Macy's was having a sale of the highest priced items in the store and they were discounting them 5% wouldn't that just make you want to run right down to the store with open wallet? Or maybe if Macy's was having a 90% off sale on everything for the next six months, eh? Use your noodle knothead, sales don't last forever. Calculate the intrinsic value of the commodity or company and realize, oil is a finite element, once gone it doesn't come back. Right now should be a select feeding freenzy, there are a lot of valuable companies in a sector way out of favor. MLP's paying dividends with yields that would make the oil moguls of old drool. Yes, while the rest of the investment community is fretting, smart money is lining up those companies that will bolt from the gate in 6 months to a year. Maybe a little longer, maybe sooner, but, it will happen. Think of it this way, the carp is a lowly bottom feeder, but look how big they get!

Feb 23 11:35 PM

[longoil:]

thotdoc,

I like Canroys (e.g. COSWF, ERF, PWE) & MLPs (e.g. SJT, HGT) the best. These are essentially small producers that payout generous dividends anywhere from 5 to 15%. In addition, when oil prices recover, the share prices increase and you get a nice capital gain as well.

The services companies like HAL, NOV, DO, NE, PDE, RIG, etc are all at yearly lows and have much potential when oil prices recover.

Of course, the major producers like COP, XOM and BP are good investments as well.

Feb 24 10:57 AM

[svkoho:]

Sean, where on earth did you come up with all these numbers? GDP 177th out of 181?. The CIA factbook has that country as Timor-Leste which is between Cameroon and the island of Saint Helena. The US is of course number one in GDP and #10 on a GDP per capita. The other figures need some sources and explanations as well. We take in $4 trillion? Wish we did. $53 trillion in debt? It's bad but not that bad unless you call debt all the obligations going forward which any ignoramus knows will not be met anyway without hyperinflation. Please consider a rewrite with appropriate qualifications or better yet, don't write anything.
www.cia.gov/library/pu...

Feb 24 11:45 AM

[AssetReset:]

To Sean Privitera (Author):

I watch and process what 60-minutes is telling me about the market like I follow Mad Money for stock tips.

When I see the bull I just think: "Oh, this pick is bull____" (and its not "ish" but coincidentally contains all of those letters)

I do agree with your "buy oil reference" but I dont like your all of your reasons.

Oil is the ultimate hedge in my eyes right now: weak us dollar, supply squeeze, global recovery.

Feb 24 05:02 PM

[EL Rider:]

During the recent oil rally NYMEX contracts typically expired at a premium to the following contract, today these contracts are expiring at as much as a $5.00 discount to the following contract. This "cantango" is so far past the carry charge that firms are renting the above mentioned tankers to store oil in the Gulf of Mexico.

Beyond the fact that some money managers are screwing their hapless customers by holding front-month contracts the market is telling you that it is not going up because there is not enough demand for oil.

Spreads are important.

Feb 25 08:54 AM

[Sean Privitera:]

The GDP 177th ranking comes from the article linked where it is referenced (Links show up as Blue).

The 4 Trillion Tax income numbers for the government come from the Bureau of Economic Analysis www.bea.gov/national/n... its the 1st result on Google for "US GDP" (Is everyone familiar with the Search engine Google?).

For the proponents of USL, USO has been outperforming it on a % basis now that the contango is shrinking.

Feb 25 10:48 AM

[Sean P's Ot...:]

Your information is misleading at best. As bad as the US economy is, we are actually fairing significantly better than all G8 nations. Germany's GDP just came out today and showed it declined 2.3%. That is from the "gem" of the EU. How do you think eastern Europe is fairing? They are on the verge of total economic collapse, with many about to default as the CDS show. When this spreads to Europe, watch out below.

The run to the US dollar is partially because of unwinding but also because, unlike your falsehood, it will always be the world's most liquid reserve currency. The Euro is also on the verge of total meltdown. Do some DD before making comments based on outdated (1 year old) data.

Feb 25 11:43 AM

[EL Rider:]

I have to comment that the USO is down about $6.20 per share since Dec. 31, 2008 while spot crude futures(Feb vs April) are down about $2.30 per barrel.

It appears that the USO is trading in a market controlled by commercial entities that is working to shake out the last of the bulls. I do wish you the best of luck on this trade but I believe that one should wait until the "canatango" conditions are over before wading into the crude oil market for a long-term bullish position, but then again I'm not into picking bottoms. You know the old saying, he who picks bottoms gets stinky fingers.

Feb 25 12:14 PM

[Sean Privitera:]

USO goes up 6% and the comments turn to crickets.

Feb 25 10:21 PM

[Sean Privitera:]

Takin some profits because of this 11%+ run up yesterday and today. Still long USO. This would be a great time to switch from USO to GLD to achieve what I was talking about above. That the GLD price was too high and now that the USO/GLD relationship has inverted GLD starts to look better.

Feb 26 10:45 AM