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Oil Markets Take A Breather - What's Next?

|Includes: The United States Oil ETF, LP (USO)

In my last article I suggested it might be time to take some money off the table. Timing on that call wasn't perfect, but oil is taking a breather today. You have some tough decisions to make if you have a lot of profits.

During the week we had a slew of positive news for oil and gas that drove the price of WTI over $50 and Henry Hub Gas over $2.5 for the front months. Today's activity appears to be profit taking and some new shorts piling in. There are still plenty of bears out there that are expecting a repeat of 2015.

I'll keep this short and my view is simple. My base case is that Oil will be between 20% and 40% higher this time next year. Six months from now I also expect oil to be flat or a little higher. A lot can and will happen between now and then that will affect my prediction, but this is based on everything I know now. I am not an industry insider and this is all based on publicly available information.

The sentiment that we are doomed to repeat the mistakes of last year and that $50 oil will unleash the fracking hounds and flood the market with oil is misplaced. It's just bad math. Demand is going to continue to grow, and the longer oil stays down, the more demand will grow. India, China and U.S. are leading the charge. China is a little more interesting as they appear to be filling an SPR and we're never quite sure when that might stop.

If you are positioned already to take advantage of the longer term, dependent on your situation and risk profile, I would hold, assuming you have an appropriate level of risk.

If you aren't already in the market, values are tougher to find. One of the reasons I am holding but not adding much is for tax reasons. I'd like the core positions I opened in Jan/Feb to be eligible for the long-term capital gains rates and see no reason to sell.

As most know, I moved out of MCEP and likely won't be back in the next few months. I added an extremely risky position in VNR bonds and preferred. I can't really recommend anyone following me in that position as there is a 50% chance they file for chapter 11 in my view. If they survive long enough and oil and gas come up, I like the company. I am still very long LGCYO.