11 Months After the Oil Bubble Burst

Oil prices peaked at around $147 a barrel on July 11, 2008. We are now about 11 months after that bubble burst, and Oil has recently climbed as high as $70 a barrel. A scan of the best and worst performing ETFs over a 52 week time frame (excluding Ultra and Short ETFs) shows the damage that has been seen in the Energy Sector since that time.

On the Worst Performers list below, you can see 3 directly related Energy ETFs, all down 56%+ over the past 52 weeks: Natural Gas (UNG), Crude Oil (USO), and Heating Oil (UHN). Interestingly enough, an "alternative energy" ETF that is involved in Solar stocks (TAN) is also down over 56%.

ETF Table Sorted By 52 Week Performance (click to enlarge)

Data from MSN Money

You can see from the above data that while Crude Oil, Heating Oil, and Solar have recovered over 4 & 13 week time frames (all are up 40%+ over the past 13 weeks), Natural Gas is down over those time frames as well and continues to be an energy laggard.

On the Outperformer List, a Gold ETF (IAU) stands out for both its 52 week and 3 year performance ... namely that both are positive. However, when looking at the more recent 13 week performance, it is lagging the USO, UHN, and TAN.

Bottom Line: Gold has been a long-term bulwark during these turbulent market times. However, it is being outpaced in the recent market recovery by Energy/Oil; barring Natural Gas which continues to be in a severe performance drain. In addition, it is interesting that there may be more positive correlation between Solar and Fossil Fuel performance than is the conventional wisdom ... more research may need to be done on that.

Disclosure: Moby Waller currently recommends bullish option spread positions in TOT & ABX.

Comments

[sdavid0419:]

Brilliant observation. I'm still losing my @ss on my Chevron stock and my GLD stock is showing a profit. If we all had 20/20 hind sight we'd know exactly when to buy and sell our stocks. I was still working after the last recession ended and one of my employees heard on TV that a certain stock had gained 300% in less than a year. I had held that stock from prior to that colapse. I told her if it gained 300% more I still wouldn't be even. For someone talking a stock up a 300% gain sounds great. There ought to be a law that if a stock is only getting back to where it should have been all along it can't be considered a gain but a cutting of the losses which is a much more accurate statement.

Jun 12 08:17 AM

[Shale Gas:]

UNG was one of the worst performers over the last 12 months, but what are your thoughts going forward for natural gas prices?

Jun 12 08:48 AM

[tedster98:]

lately I've only been buying rock solid dividend stocks. At least I generate some income.

Jun 12 09:42 AM

[thiazole:]

Unfortunately I don't believe the real oil bubble has even formed yet. High oil prices played a large role in the 1974 recession and I suspect that as prices eased in the recession that many thought the bubble was over. Little did they know what was coming.

That is where we are right now. Inefficient businesses that weren't profitable during the good times are going under, so the economy is becoming more efficient and will be able to support higher oil prices than it could before this recession. I think $300 a barrel is very likely over the next 5 years before the next recession hits.

Jun 12 10:20 AM

[sunnsea:]

We have a lot of SUVs and 4 X 4s on the road that have been dumped on the market a very low prices over the past 11 months. It will take 10 years or more to get of these monsters off the road and out of service, finally replaced by smaller, more efficient vehicles.

Jun 12 10:27 AM

[CaptainJJack:]

This is clearly a China dollar play. We are still running a huge trade deficit with China and it doesn't want to invest anymore in dollar denominated bonds.

However, if they in any way signal they don't want anymore US bonds, their trillion dollar current holding of US bonds takes a hit.

SO, they buy commodities, especially oil, with the new dollars they get from the US.

This also explains why Natural Gas has lagged since it is produced and sold pretty much in the US. There is no China dollar play involved.

Jun 12 10:40 AM

[Ferdinand E...:]

The oil bubble you say. Hmm. I'm doing some work on that, and for some reason I can't take that word bubble in my mouth. What I choose to believe is that behind this 'so-called' bubble is a shortage of oil. And if it is a shortage of oil because suppliers prefer to keep the stuff in the ground and sell it later, then I'm not sure that bubble is the right word.

Jun 12 11:00 AM

[sickofthehype:]

There's been a lot of everything dumped at low prices, but regardless sales are way down. Your post has no point to it. There will always be 4X4's and SUV's and big trucks, just hopefully they end up with modern clean diesel and new technology. Current oil prices are not spiking based on 4X4 sales, that's humor.


On Jun 12 10:27 AM Sunnsea wrote:

> We have a lot of SUVs and 4 X 4s on the road that have been dumped
> on the market a very low prices over the past 11 months. It will
> take 10 years or more to get of these monsters off the road and out
> of service, finally replaced by smaller, more efficient vehicles.

Jun 12 11:51 AM

[thiazole:]

When gas prices are $6 a gallon, I think the market will take care of inefficient vehicles all by itself. Most people who have a big truck also have a car. Whether they choose to drive one or the other has a lot to do with gasoline prices.


On Jun 12 11:51 AM sickofthehype wrote:

> There's been a lot of everything dumped at low prices, but regardless
> sales are way down. Your post has no point to it. There will always
> be 4X4's and SUV's and big trucks, just hopefully they end up with
> modern clean diesel and new technology. Current oil prices are not
> spiking based on 4X4 sales, that's humor.

Jun 12 11:56 AM

[Pearsonpc:]

Interesting facts and statistics.

I think that as long as there is an infinite use and growing demand of a finite resource, there will be increasing prices over time. Or, at least volatile prices, like we have seen.

Seems to me a lot of the current price escalation is people trying to find somewhere to hide dollars other than gold.

Jim Pearson
Pearson & Pearson

Jun 12 04:00 PM

[Old Trader:]

Shale,

Although not directed to me, I'll take a stab at your question. Unless there's an unusually hot summer (which isn't looking likely, at this point, or some major Gulf hurricanes, it doesn't look good for gas over the next few months.

Although NG should be a no-brainer, from an ecological standpoint, both for power plant useage, as well as having vehicles run on it (an old technology), the current administration seems intent on ignoring ANY hydrocarbon-based solutions to US energy problems.

A "normal" to "harsh" winter would help cut into the supply glut.


On Jun 12 08:48 AM Shale Gas wrote:

> UNG was one of the worst performers over the last 12 months, but
> what are your thoughts going forward for natural gas prices?

Jun 12 06:07 PM

[john the ba...:]

there is just massive ,masssive volume moving into UNG. Apparently someone thinks its a good buy. It is currently coming to the end of a price triange. Next week it WILL have to make its mind up and break one way or the other. Wait for the breakout. The chart and the price will tell you what to do. Everything else is just so much noise....... take this advice from somone who is finnaly getting to figure out this money game

Jun 12 07:29 PM

[Bruce Pile:]

Old Trader, you're right about NG being a no brainer from an ecological standpoint. The energy crisis we face is all about timing and EROEI. The energy sources are all there - solar, wind, future ethanols that will work, and our remaining fossil allotment. The problem is that some of the nonfossil alternatives will never have the EROEI to effectively supply the world's energy and will take many years to scale up to what is needed for oil replacement. The other stuff that will have the needed EROEI will also take too long - we will face the net energy cliff edge before they are scaled up to what is needed (see my Instablog post "The Alternative Energy No One Is Thinking About"). That leaves natural gas as the critical bridge fuel to get us from the cliff's edge to the other side where we will have high EROEI non fossil fuels scaled up and economical.

But even if you did not even consider all the net energy situation (which no one is considering anyway) NG, in addition to being the most energy dense and highest EROEI energy source, is also the quickest and cheapest way to cut all forms of pollution!

Pollutant NG Oil Coal
CO2 117,000 164,000 208,000
Carbon Monoxide 40 33 208
Nitrogen Oxides 92 448 457
Sulfur Dioxide 1 1122 2591
Particulates 7 84 2744
Mercury 0 0.007 0.016

Source: EIA - Natural Gas Issues and Trends, 1998

And also from the DOE, they estimate that 50 % of all air pollution comes from our cars and trucks (80% in cities). They say that an immediate switch to NG powered vehicles would:

cut CO2 by 25%
cut NOx by 35% - 60%
cut carbon monoxide by 90% - 97%
cut other nonmethane hydrocarbon emissions by 50%-75%

And we have the technology already developed to do this! You can switch your vehicle over with a trip to the mechanic and about a $1500 bill. They commonly do this in many other nations. Considering that NG engines run so much cleaner that the oil stays pure and engines last 2 and 3 times as long, that switchover bill pays for itself many times over.

What other government programs looking at putting windmills on cars soaking up billions of our tax payer dollars would immediately cut pollution by the percentages above?

But they ignore the Pickens Plan and would rather fill the air with unnecessary pollution from our current imported oil burning while they work on worthless, low EROEI technologies of tomorrow.

Jun 13 10:28 AM

[Shale Gas:]

Old Trader...thanks for your input.

Jun 13 05:41 PM

[H. T. Love:]

On Jun 12 06:07 PM Old Trader wrote:

> Shale,
>
> Although not directed to me, I'll take a stab at your question. Unless
> there's an unusually hot summer (which isn't looking likely, at this
> point, or some major Gulf hurricanes, it doesn't look good for gas
> over the next few months.

I agree 100%. And with both Joe Bastardi of Accuweather and CSU predicting a milder hurricane season, and Bastardi also predicting a milder summer (less A/C means less peak-usage of electricity, meaining less NG used for generators that support peak draw), It certainly looks like NG will not surge anytime soon.

>
> Although NG should be a no-brainer, from an ecological standpoint,
> both for power plant useage, as well as having vehicles run on it
> (an old technology), the current administration seems intent on ignoring
> ANY hydrocarbon-based solutions to US energy problems.

I thought I heard BHO mention "liquified coal" or "coal gasification" many times? Although, I don't know if that is really a "solution" or just marketing hype by coal producers. But I can't recall hearing NG mentioned much, if at all.

>
> A "normal" to "harsh" winter would help cut into the supply glut.

I've started looking for fall/winter forecasts, but haven't found one yet (I guess I need to go to the farmer's almanac).

>

Jun 14 06:42 AM

[H. T. Love:]

On Jun 12 08:48 AM Shale Gas wrote:

> UNG was one of the worst performers over the last 12 months, but
> what are your thoughts going forward for natural gas prices?

"Old Trader" has it right I think. But I wanted to mention another thing that should affect your thinking. Several other SA commenters made me aware of this.

UNG rolls 100% of its futures contracts at expiration each month. With contango, this means that they sell front-month at a lower price than they pay for the newly-purchased futures contracts. If the future being sold is priced higher than what they paid for it (meaning that the intrinsic value of the contract rose more than the time-value decayed - not likely in a severe oversupply condition as we are now) a "profit" could be "booked". Otherwise, a loss is taken. So a combination of fees and reducing number of contracts owned at higher prices makes it difficult to earn a return, or even stay even, unless NG has an appreciable rise in a relatively short period.

Another consideration is taxes. I'm not fully informed here, so you should check with your advisor. UNG is an LP. You may receive a K-1 (IIRC) and tax filing is more complicated. "Dividends" are treated as "return of capital" until your investment has been returned and treated as "dividends" thereafter. For retirement accounts, this has no effect. For other account types it does have implications. I seem to recall also that there is some oddball "capital gains" treatment too, but I'm unsure about that.

Being a believer in "The Pickens Plan", I had recently begun looking into NG and UNG as a proxy for NG. I've been collecting my thoughts and was hoping to share via an SA post.

Not sure if that will happen. But anyway, if you want to see a consolidation of my thoughts (keeping in mind that I'm really new at all this - so be very suspicious), you can look here.

seekingalpha.com/insta...

To view my "Stream of Consciousness", which I try to update almost daily (at least for now), go to seekingalpha.com/insta...

Another thing to consider is the recent spike in bullishness in ETFs generally. Since "the market is often positioned to hurt the greatest number of people" and "extreme sentiment in one direction is a good contrarian indicator", check out this site.

www.indexuniverse.com/...

In there we see "and the US Natural Gas ETF (NYSE Arca: UNG), which brought in $812 million and has attracted $1.7 billion YTD. Someone, clearly, is betting on a recovery in natural gas".

If you combine that with what my charts show, starting in mod-to-early may, you'll see this inflow confirmed.

BTW, StockCharts.com is a really good tool. I don't use it extensively yet (my trading platform gives me most of what I need for my level of experience now) but it can probably augment what other sources you use.

I can't think of anything else to mention now that I've not included in my blogs.

I hope this gives you some worthwhile material to ruminate on.

Remember, I'm a n00b, so be suspicious if you decide to look at my stuff.

HardToLove

Jun 14 08:08 AM

[H. T. Love:]

On Jun 12 08:17 AM sdavid0419 wrote:

> Brilliant observation. I'm still losing my @ss on my Chevron stock
> and my GLD stock is showing a profit. <snip>

Dollar index has *recently* begun to strengthen and most commodities have begun to weaken (oil excluded - it's being manipulated by JPM, GS and others I think - based on other SA articles recently). GLD closed Friday at $92.17, -$4.19 since the June 2 close at $96.36. Keep a close eye on it - if the dollar continues the recent trend (only near-term I think, I can't see this long-term right now), you may need to have to be quite nimble.

I heard someone comment Thursday that gold seems to be manipulated - everytime it hits $980, it reverses. I don't know, but with all the shenanigans we've learned of, nothing surprises me.

HardToLove

Jun 14 08:22 AM