Author Topic: Help me speculate on the price of oil!  (Read 1198 times)

Nicholas Carter

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Help me speculate on the price of oil!
« on: April 17, 2020, 11:52:32 PM »
My model is simple. Most, probably more than 60% of the drop in the price of WTI and Brent oil is caused by the demand destruction of the Coronavirus lockdowns. So whenever the quarantines end, we should expect demand to return as people start driving and buying non-essential goods and getting back into life. The diplomatic standstill leading to supply increases will eventually end, either from negotiation, or because somebody's economy forces them to blink. Timing either of those things is a fools errand, but they will happen around the same time that the economy starts to pick back up. At that time, I expect the price of oil to return to basically where it was in January. If that happens at any point in the next 10 years, it would still represent 7% nominal growth between now and then.
There are four ETF's that derive their price from the movement of oil futures: The USO, DBO, and UCO derive from WTI oil, while the BNO derives from Brent oil. USO and UCO are both down significantly, 68 and 90 percent respectively. They both have a lot of the room for growth I was talking about, but I don't know if fund insolvency is even an issue I should worry about with these. DBO is down a lot less, closer to a 40 percent loss. According to the historical analysis though, DBO is a lot more responsive: price increases are reflected in the DBO first, and USO and UCO later. BNO derives it's value from a different "flavor" of oil than the other three. Brent is normally more expensive than WTI, and more of it comes from countries that aren't america. It's also had about a 40% drop, but from a higher cost point to a higher cost point, so it's currently the most expensive option.
I look forward to hearing people's arguments for what combination of these funds seems like the best way to make my gamble.

jeroly

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Re: Help me speculate on the price of oil!
« Reply #1 on: April 18, 2020, 04:14:25 AM »
My model is simple. Most, probably more than 60% of the drop in the price of WTI and Brent oil is caused by the demand destruction of the Coronavirus lockdowns. So whenever the quarantines end, we should expect demand to return as people start driving and buying non-essential goods and getting back into life. The diplomatic standstill leading to supply increases will eventually end, either from negotiation, or because somebody's economy forces them to blink. Timing either of those things is a fools errand, but they will happen around the same time that the economy starts to pick back up. At that time, I expect the price of oil to return to basically where it was in January. If that happens at any point in the next 10 years, it would still represent 7% nominal growth between now and then.
There are four ETF's that derive their price from the movement of oil futures: The USO, DBO, and UCO derive from WTI oil, while the BNO derives from Brent oil. USO and UCO are both down significantly, 68 and 90 percent respectively. They both have a lot of the room for growth I was talking about, but I don't know if fund insolvency is even an issue I should worry about with these. DBO is down a lot less, closer to a 40 percent loss. According to the historical analysis though, DBO is a lot more responsive: price increases are reflected in the DBO first, and USO and UCO later. BNO derives it's value from a different "flavor" of oil than the other three. Brent is normally more expensive than WTI, and more of it comes from countries that aren't america. It's also had about a 40% drop, but from a higher cost point to a higher cost point, so it's currently the most expensive option.
I look forward to hearing people's arguments for what combination of these funds seems like the best way to make my gamble.
I don't really know a huge amount about this but I do know the following:

USO is not based on the price of oil, but rather, on the price of oil futures contracts.  So the price of oil could drop 90% in a day but if everybody thought that the price would be back to where it was expected to be in, say, October, USO would not see any price change at all.

Moreover, since oil futures contracts expire but USO continues on after the expiration date, what happens is that the contracts are 'rolled' over to some future expiration date (perhaps the very next one, I'm not sure).  This is not a free transaction, so there are reasonably high transaction fees baked in to the pricing along with the expense ratio (0.8% or so IIRC).  Because of these transaction fees (plus the futures price vs. spot price issue), in general USO is not considered a good proxy for 'buying the oil market' and is better suited for short term speculation or hedging.

I would guess that many of those other ETFs you mentioned operate in the same way with the same issues, but that's just a guess as I have no knowledge on the topic.

beltim

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Re: Help me speculate on the price of oil!
« Reply #2 on: April 18, 2020, 04:25:05 AM »
Moreover, since oil futures contracts expire but USO continues on after the expiration date, what happens is that the contracts are 'rolled' over to some future expiration date (perhaps the very next one, I'm not sure).  This is not a free transaction, so there are reasonably high transaction fees baked in to the pricing along with the expense ratio (0.8% or so IIRC).  Because of these transaction fees (plus the futures price vs. spot price issue), in general USO is not considered a good proxy for 'buying the oil market' and is better suited for short term speculation or hedging.


Jeroly is spot on with this advice.  The phenomenon where the longer-dated future is more expensive that the nearer-term future is called contango, and is a major source of decay in value of any ETF that tracks a futures market.  Indeed, these ETFs do not track the price of oil well on a long-term basis: https://www.investopedia.com/articles/investing/080116/how-oil-etfs-perform-relative-oil-price-uso-szo.asp

Perhaps a better option for you is to trade oil futures directly.  The market agrees with you, though, and so futures prices for oil deliverable in 5 months are about 80% higher than the current spot price:
https://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html

reeshau

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Re: Help me speculate on the price of oil!
« Reply #3 on: April 18, 2020, 04:34:49 AM »
I'm surprised there is no mention of the Saudi / Russian price war in your discussion.  This predates the escalation of coronavirus by a bit (March 8) and while declared over, there is no telling what the next step is, particularly after whatever economic damage is done by the pandemic.

https://en.m.wikipedia.org/wiki/2020_Russia%E2%80%93Saudi_Arabia_oil_price_war

While oil has always been cyclical, I am very leery of investing in something where the major actors have something other than a profit motive.

vand

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Re: Help me speculate on the price of oil!
« Reply #4 on: April 18, 2020, 10:45:52 AM »
I'm diversifying my portfolio by putting some of my monthly buying into a WisdomTree commodities ETF (AIGC/AGAP), which will have plenty of exposure to oil. I don't know if you can buy these in the US.

Commodities have been a terrible place to put your money in for the last 40 years, but I want to have 2-3% exposure as an inflation hedge. I don't feel I need any more than that as I already have a lot of precious metal exposure, which I class differently to general commodities.
« Last Edit: April 18, 2020, 10:51:38 AM by vand »

Wintergreen78

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Re: Help me speculate on the price of oil!
« Reply #5 on: April 18, 2020, 11:08:54 AM »
My model is simple. Most, probably more than 60% of the drop in the price of WTI and Brent oil is caused by the demand destruction of the Coronavirus lockdowns. So whenever the quarantines end, we should expect demand to return as people start driving and buying non-essential goods and getting back into life. The diplomatic standstill leading to supply increases will eventually end, either from negotiation, or because somebody's economy forces them to blink. Timing either of those things is a fools errand, but they will happen around the same time that the economy starts to pick back up. At that time, I expect the price of oil to return to basically where it was in January. If that happens at any point in the next 10 years, it would still represent 7% nominal growth between now and then.
There are four ETF's that derive their price from the movement of oil futures: The USO, DBO, and UCO derive from WTI oil, while the BNO derives from Brent oil. USO and UCO are both down significantly, 68 and 90 percent respectively. They both have a lot of the room for growth I was talking about, but I don't know if fund insolvency is even an issue I should worry about with these. DBO is down a lot less, closer to a 40 percent loss. According to the historical analysis though, DBO is a lot more responsive: price increases are reflected in the DBO first, and USO and UCO later. BNO derives it's value from a different "flavor" of oil than the other three. Brent is normally more expensive than WTI, and more of it comes from countries that aren't america. It's also had about a 40% drop, but from a higher cost point to a higher cost point, so it's currently the most expensive option.
I look forward to hearing people's arguments for what combination of these funds seems like the best way to make my gamble.

Do you work in the industry? Do you have any experience with commodities speculation? Since futures contracts and contango are new concepts to you Iím guessing the answer to both of those questions are no.

Good luck with your plan. Please post trades and how much you lose. I like to watch these threads go up in flames.

hodedofome

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Re: Help me speculate on the price of oil!
« Reply #6 on: April 18, 2020, 11:13:24 AM »
The only way to make money on the price of oil is to invest in oil companies. Trying to make money on the long side using commodity ETFs wonít work, and if the futures are in contango that wonít work either.

If oil isnít in contango then you can try investing in futures on the long side.

bwall

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Re: Help me speculate on the price of oil!
« Reply #7 on: April 19, 2020, 07:44:17 AM »
Chiming in to agree with what others have said upthread already;

If you don't know what the words contango and backwardation mean well enough to explain them to a five year old, then you will probably have your a** handed to you when speculating with oil.

Better to just invest that money in beer or wine. Then you can enjoy it when you drink it.

johndoe

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Re: Help me speculate on the price of oil!
« Reply #8 on: April 19, 2020, 08:14:03 AM »
XLE (Energy Select Sector SPDR) was up 10% Friday.  As someone who knows nothing about investing other than buying index funds, it sure seems logical that an ETF like this (that's at around half what it has been for the last five years) will eventually return to normalcy.

MustacheAndaHalf

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Re: Help me speculate on the price of oil!
« Reply #9 on: April 19, 2020, 11:13:39 AM »
You could question if OPEC or OPEC+ truly controls oil production, but if you can't ignore the power of the oil cartel on prices.  They decide supply, and supply determines prices.  So unlike Apple stock which rises on better than expected earnings, Saudi Arabia can decide to supply more oil than is demanded, and keep prices artificially low.  When will oil recover?  When OPEC says so.

ice_beard

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Re: Help me speculate on the price of oil!
« Reply #10 on: April 19, 2020, 12:18:16 PM »
XLE (Energy Select Sector SPDR) was up 10% Friday.  As someone who knows nothing about investing other than buying index funds, it sure seems logical that an ETF like this (that's at around half what it has been for the last five years) will eventually return to normalcy.

Half of XLE is Chevron and Exxon.  https://www.etf.com/XLE#overview   You pay an ER of 0.13% for shares you can probably buy for free if you have any half decent brokerage account.  Plus, I personally don't really want to own XOM right now. 

To the OP.... Vanguard offers analyst ratings and other important factors to help you decide which companies might be a good buy.  If you want to go long, you need to know which companies are exposed to which markets.  There are a lot of US oil cos selling a DEEP discounts right now but that's because they are involved in the crappiest markets (shale) and/or are the most leveraged.  OXY is about the best example I can think of off the top of my head. 

It's also helpful to learn about the segments of OG production because they fare differently under different circumstances.  The "Oil at $23" has a few pages of recent discussion on the current OG environment.  Maybe start there. 

Daisyedwards800

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Re: Help me speculate on the price of oil!
« Reply #11 on: April 20, 2020, 02:32:11 PM »
I bought some OXY.

J Boogie

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Re: Help me speculate on the price of oil!
« Reply #12 on: April 20, 2020, 03:20:06 PM »
As I mentioned in another thread, I bought some tanker companies. Only 1% of my invested assets though, this is a just for fun play.

My rationale is that all this sidelined cash will be interested in scooping up oil and will be looking for places to keep it or underserved markets where it can be sold off for for relatively smaller losses.

MustacheAndaHalf

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Re: Help me speculate on the price of oil!
« Reply #13 on: April 20, 2020, 06:31:29 PM »
Per the thread title, did people "speculate on the price of oil" going negative?

"U.S. oil price collapses to below zero as storage fills up"
https://www.houstonchronicle.com/business/article/Oil-crashes-to-11-a-barrel-as-storage-fills-up-15212810.php

CNBC has predicted it for some time - for worldwide oil prices, not just the U.S.  Expect more of this as mid-May approaches - but OPEC is again a key factor which could decide to cut production.

dividendman

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Re: Help me speculate on the price of oil!
« Reply #14 on: April 20, 2020, 08:19:04 PM »
Just so I'm clear here, we are:

1) Drilling holes in ocean floors and other places to get oil
2) Transporting that oil to various locations by boat and rail
3) Storing it in a hole or container

... and the people getting it out of the ground in 1) are paying for 2) and 3)?

Makes sense...

Wintergreen78

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Re: Help me speculate on the price of oil!
« Reply #15 on: April 20, 2020, 08:55:06 PM »
Just so I'm clear here, we are:

1) Drilling holes in ocean floors and other places to get oil
2) Transporting that oil to various locations by boat and rail
3) Storing it in a hole or container

... and the people getting it out of the ground in 1) are paying for 2) and 3)?

Makes sense...

They are losing money on each barrel, but they are going to make up for it with volume.

J Boogie

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Re: Help me speculate on the price of oil!
« Reply #16 on: April 21, 2020, 09:51:55 AM »
Just so I'm clear here, we are:

1) Drilling holes in ocean floors and other places to get oil
2) Transporting that oil to various locations by boat and rail
3) Storing it in a hole or container

... and the people getting it out of the ground in 1) are paying for 2) and 3)?

Makes sense...

This is part of why USO got closed.

There's a disconnect where speculators buying futures via an ETF create a false demand. These speculators aren't storing the oil, but they spur production by buying the futures. So when the storage runs out the ETF must be closed.

dividendman

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Re: Help me speculate on the price of oil!
« Reply #17 on: April 21, 2020, 02:16:12 PM »
Just so I'm clear here, we are:

1) Drilling holes in ocean floors and other places to get oil
2) Transporting that oil to various locations by boat and rail
3) Storing it in a hole or container

... and the people getting it out of the ground in 1) are paying for 2) and 3)?

Makes sense...

They are losing money on each barrel, but they are going to make up for it with volume.

lol!

ChpBstrd

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Re: Help me speculate on the price of oil!
« Reply #18 on: April 21, 2020, 02:32:37 PM »
There is a contradiction in the title. The only way we could help you is to persuade you not to speculate on the price of oil. :)

The people who lost everything betting that $20 was the bottom are why futures went negative. Beware the narratives we tell ourselves. Anything can happen. Common sense has nothing to do with anything. There is a compelling case for the opposite of every bet.