Profit From The Panic In Oil

Oil Chart – Jan 2011 to Jan 2016

Oil Chart – Jan 2011 to Jan 2016

Oil prices have fallen 74% from its highs of $110 per barrel in 2011 to a low of $27 per barrel on 20 Jan 2016. A supply glut, coupled with weak demand (especially from China), have been the main factors. The rise of U.S. shale oil producers and the refusal by OPEC to reduce production and now recently, upcoming oil exports from Iran (after sanctions were lifted) have all contributed to the short term over supply of oil.

As of 22 Jan, oil has seemed to hit a potential bottom and has now rallied back up to $32. So, how long can oil stay at this level ($27- $32)? What wold it take for oil to rebound back to $60-$70 and even back to $100+ per barrel? Well, it all depends on when demand will suck up the existing oversupply of oil and this in term depends on when oil production start falling.

Oil production will start to fall as more and more oil producers go bankrupt and when OPEC (mainly made up of the Saudi Arabia + Arab States) agrees to cut their output. The reason OPEC has not been wanting to cut their production up to now is because they want these low prices to drive US oil producers out of business (especially the Shale oil producers) so OPEC can reclaim back the market share they have been losing. Of course, these low oil prices have also been hurting the Saudis as well (they have been suffering large current account deficits and have been selling other assets to finance their  government spending).

Let’s look at the cost of producing a barrel of oil:
Brazil $49
Canada $41
US $36
US Shale oil $70+
Saudi Arabia $10 

At current oil prices, it is projected that half of US shale drillers will go bankrupt in the next 1-2 years. As for the Saudis, the IMF warned that most countries in the Middle East will run out of cash within five years if oil prices don’t rise above roughly $50 per barrel.

The bottom line is that there is a high probability that oil prices will eventually rise back above $50 a barrel and eventually back into the $90-$100 per barrel price range. This presents a potential opportunity for investors and traders to profit from the short term prices of oil.


Assets that Follow Oil Prices

So, how do investors/traders gain exposure to oil and profit from the potential rebound. There are a few ways:

1) Go long on Oil Futures or Oil ETFs
The first approach is to go long on oil futures. Oil futures are covered in Conrad’s Pattern Trader Tutorial. Since, I don’t trade futures myself, I will rely on oil ETFs. There are many oil ETFs you can google and read about. The most traded ones are USO and USL You also have DBO, OLEM and OIL. These oil ETFs more or less track crude oil prices but it is not a perfect correlation as there are tracing errors due to the contango effect. In these respect USL seems to be a better instrument now. However, if you are a very short term trader (1-2 months trade), it should not matter that much.

2) Go long on Energy Companies
Another approach is to go long on energy companies. Stick to the largest ones like Exxon Mobil (XOM), Phillips 66 (PSX) which Buffett has been adding to, COP, CVX etc… It is a more indirect approach but as crude oil prices rebound, so should the stock prices of these energy companies.

3) Go long on Energy ETFs
Finally, if investors cannot decide which every companies to invest in, they can simply but the Energy ETF- XLE. The advantage of going long XLE and Energy companies is that you do not have the Contango problem that you have with Oil ETFs.


What is the Strategy?

Given that no one can predict the absolute bottom of oil prices and how long it will take for prices to rebound back to pre-crisis levels, what is the best strategy for managing risks and profiting from oil? There are two main strategies.

Strategy 1: Buy and Hold
The simplest strategy is to buy, close your eyes and take a long term view  of at least 5 years, There is a very high chance that in 5 years or more, oil prices will be much higher than where they are now. A way to do this is for investors to dollar cost averaging. This means to invest a fixed dollar amount (e.g. $5,000+) at regular intervals (e.g. every 3 months).
It’s best to diversify the exposure to between oil ETFs, energy companies and maybe the XLE.
 
Strategy 2: Wait for Confirmed Uptrend

The second approach is to only enter when we have a confirmed uptrend in the oil ETFs and/or energy ETFs. This is when the 50MA crosses back above the 150MA and both MA and flat or sloping up (or when price crosses above 200MA. and 200MA sloping up). The advantage of this approach is you only enter when the uptrend moment is confirmed…. the downside is of course you tend to enter a higher prices than when the bottom is.

Below are the two videos I have created to share with you my insights.

Profiting from the Oil Crisis Part 1

Profiting from the Oil Crisis Part 2

If you are interested in enhancing your knowledge, do join us for a free today.

About your author

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<p><center>Adam Khoo</center>

Adam Khoo

Chief Trainer in Wealth Academy™

Adam Khoo is an award-winning Singaporean entrepreneur, best-selling author, professional stocks & Forex trader and peak performance speaker. Adam conducts Wealth Academy™ Program on a quarterly basis to educate the public about value momentum investing using deep fundamental and technical analysis approach.

Disclaimer

Any content in this presentation should not be relied upon as advice or construed as providing recommendations of any kind. It is your responsibility to confirm and decide which trades to make. Trade only with risk capital; that is, trade with money that, if lost, will not adversely impact your lifestyle and your ability to meet your financial obligations. Adam Khoo Learning Technologies Group Pte Ltd (AKLTG) and its associated trainers are not liable for any losses incurred from your investment activities. Past investment performance is not necessarily indicative of future performance, even if the same strategies are adopted. All forms of investments carry risks. Such activities may not be suitable for everyone. This course presentation is not meant to be a recommendation to buy or to sell securities nor an offer to buy or sell securities. The publishers of Adam Khoo and AKLTG are not brokers, dealers or registered investment advisors and do not attempt or intend to influence the purchase or sale of any security. AKLTG does not guarantee the accuracy or completeness of the information displayed. This is shared purely for educational purposes only. 

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