After a sustained downward trend in crude oil over the last three months of the year, oil prices have corrected slightly in December and crude is above $100 yet again for the first time since the end of October.
Crude oil was up after select government data showed that oil inventories have fallen for the fourth week in a row. However, the technical picture on the crude oil spot price is anything but confident. The US picture on crude is the most detached from the Brent benchmark than it's been eight months, due to rising US oil production.
The move on Friday was also attributable to an expectant decline in crude stockpiles. Over the past week, oil prices have been up roughly 3% on macro market confidence and predicted rising demand for US energy.
Also helping catalyze the move was the fact that last Thursday's Labor Department data showed that unemployment benefits dropped the most since November 2012. I had pointed out in a previous article that Thursday's unemployment data was going to be one of very few catalysts that could potentially move the market during Christmas week.
In the midst of oil falling, some would argue that things are looking up for crude producers - recent articles like this one in NPR.com are pointing to the fact that producers can't seem to move oil to refineries quick enough.
But really, what I'm counting on in 2014, is the same type of volatility surrounding oil prices that we saw in 2013. While it's likely that crude prices will stay in the $85- $115 range in the coming year, most analysts are calling for an average price of somewhere around $92-94.
If you want to invest in crude in 2014, there are many ETFs that make that possible, including the ones shown below:
(click to enlarge - source)
While many analysts are predicting that US oil prices are going to drop in 2014 due to this domestic stockpiling, it's likely that oil prices are going to remain somewhat steady heading through the new year and into the first couple of quarters of 2014.
If oil were to stay in the range of how it is finishing 2013, this will be good news not only for oil companies, those invested in oil companies, but also for the US economy in general. If oil tumbles, it could drag the macro markets lower with it. It's a situation where you need to either play the volatility, or hedge.
Moving into the new year, a great way to hedge yourself of your long crude oil would be to short companies that are dependent on oil that are also fundamentally susceptible to weakness. Additionally if you're short crude heading into 2014, then a good way to hedge yourself would be to potentially stake long positions in companies like Kodiak Oil & Gas (NYSE:KOG) that will flourish even if oil prices remain stagnant without falling.
Long story short, the sector is a wildcard heading into the new year, and this investor recommends making sure you hedge and insure no matter what side of the oil trade you are on.
Tickers included: (NYSEARCA:USO) (NYSEARCA:DBO) (NYSEARCA:OIL) (NYSEARCA:SCO) (NYSEARCA:UCO) (NYSEARCA:DTO) (NYSEARCA:USL) (NYSEARCA:DNO) (NYSEARCA:OILZ) (NYSEARCA:SZO) (NYSEARCA:OLO) (NYSEARCA:TWTI) (NYSEARCA:DWTI) (NYSEARCA:UWTI) (NYSEARCA:OLEM) (NYSEARCA:CRUD)