Short Oil as a Long Investment

There is an increasing number of discussions and recommendations about being short or long oil.  A number of innovative ETF vehicles have been springing up to provide ways of playing oil long or short, even leveraged in either direction.  At the same time the usual suspects are out there encouraging individuals to try their hand in the futures market.

To be up-front, we are long (DUG) which is a leveraged short on a number of oil and gas related stocks. A fair number of people have come out and questioned this as an "investment." In the short-term, of course it is not. Nobody can be right in the short-term without inside information or luck. (We’re up 20% in DUG but that’s just luck, see below for the true long-term story.)  But if one is looking out a few years and running a diversified portfolio, vehicles like DUG and others can come in very handy.

First of all they are a hedge. If you don’t have something to hedge against falling oil prices don’t pretend this is a reason to be involved.  We invest fairly actively in next-generation energy technologies from batteries, to new power generation to infrastructure. These investments are all qualified for our portfolio on oil at $150, or $100, or even $70.

However, if oil goes down sharply we have seen that everything goes down with it; solar, wind, power management, and so on. By being short "old" energy and long "new" energy, we can insulate a bit during short-term swings.

Long-term we do think that being short oil here is an investment. There’s a 100+ year data set on our ability to adjust to any high commodity price over time and drive it inexorably lower (on an inflation-adjusted basis) time after time. Oil will be no different. It’s beyond the scope of a blog post but those interested should certainly pick up a copy of The Ultimate Resource by Julian Simon. We also don’t yet publish much of our energy work to individuals, but for now can highly recommend the work that Tom Konrad's team does over at altenergystocks.com.

Disclosure: Long DUG.

Comments

[mangolfer:]

I've been long DUG since Tues and doing very well....

2008 Jul 21 07:08 AM

[ETF STER:]

Until there is a true oil commodity short ETF, there will not be a correct or true corollation to oil.

DUG is not a true oil short ETF, it tracks companies that do business in the oil industry, not the oil itself.

2008 Jul 21 08:25 AM

[LoveShorting:]

Chistletoe - - Thanks for writing your thoughts down. Now I know you are a fool and a rude one at that. This forum is not advanced by baseless insults of people who are generous enough to share their time and ideas.
Disclosure - - long DUG and making $ at it (isn't that the idea?)

2008 Jul 21 09:05 AM

[Wandering W...:]

If you want a purer play on shorting oil take a look at DTO. This should give you "a correct or true corollation to oil".

2008 Jul 21 09:59 AM

[Gigem77:]

You can't drive a car looking out the rear window. 100+ years of commodity data has to be adjusted for the addition of a growing middle class in both China and India. And then adjust for the effects of rapid growth in world population. Then look at the failure of oil producers to increase production past 86 million bbpd. 10 years ago China was an oil exporter, today they import over 7 million barrels per day and that number is growing every year. That's a paradigm shift. I hope you put some tight stops on those shorts.

2008 Jul 21 10:38 AM

[Greg Pinelli:]

Adjustments will be made..demand destruction ALWAYS comes into play..and China and India are not the financial stalwarts most believe. When those two flash in the pans are hit with ever increasing costs they'll revert to much less aggressive, high profile postures...as for DUG...
It's important to do ones due diligence...DUG is a play on oil companies/oil related companies..NOT OIL.....It's very possible..in fact, we saw it last week...oil can go down and oil companies can rise. If an investor wants to play a fall in oil/gas then buy DTO. The kind of recession/depression that would be brought on by $200 oil and $20 Nat gas would be devastating for companies...everything would grind to a halt.

2008 Jul 21 11:46 AM

[Stephen Fra...:]

short uso is pretty pure oil play.

i messed around with DUG until i got tired of it not tracking oil well enough.

2008 Jul 21 11:00 PM

[Calvin C.:]

DTO works the same way as DUG, but gets more gain.

2008 Jul 22 12:42 AM