Saturday, September 25, 2010

Oil Panic of 2008? Who Remembers?

Soon the summer of 2008, when the price of oil hit $147 a barrel, will be forgotten. Just like the two points in the 1990s when oil was selling for $10 a barrel. How about Y2K? When the clocks ticked in the the new year, the year that was supposed to send the world's computers into chaos and confusion, the first day of that year began, as most do, bright and sunny. Just another day on Planet Earth.

We're going to burn oil until there's none left to burn. Meanwhile, over time, energy technology will advance and we will get more and more of our supplies from the sun, the wind, coal and nuclear. There's no mystery about these things. But fear, panic, complacency and arrogance will always cycle through the pricing of oil.

What Happened to $150 a Barrel Oil?

With the reporting of financial markets, there is only one truth: First price, then news. When oil exploded through $100.00 and raced up towards $150.00 in 2008, then and only then, did stories about peak oil erupt all over the web. People took note and some began to prepare for the end of the world as we know it. Solar and wind power farms gained massive and rapid funding. Individuals loaded up storage facilities with canned goods and toilet paper. Panic ensued at the pump. And for a time, automobiles the size of a barbecue grills were seen puttering along the road, careful to avoid being smashed by the army of SUVs.

First price. Then news. Then extreme reactions. Now with oil hovering near $75.00 a barrel, there is nary a trickle about the coming world's demise. In fact, the energy markets are downright quiet and boring these days. And there is plenty of toilet paper in stock at stores all over the world -- no need to hoard the stuff. What gives and how to play this "quiet news?"

Oil prices have been quietly falling lower, much to the chagrin of those who have been longing to say, "I told you so." What's happening? Take a look around and you will note that economic growth is currently a tepid beast without much of an appetite for all things energy. As a result, oil supply is comfortably outpacing demand. Inflation concerns are also on the quiet side. When inflation is a concern, nature's "black gold" will rise as money flees into tangible investments. During inflationary times, cash is trash as inflation reeks havoc on the buying power of fiat currency. But for now, that is not a huge concern and oil prices are trending lower.

There are four main energy related ETFs that I like to use in my own trading. For oil, the best bet is the United States Oil Fund and for natural gas, the United States Natural Gas Fund. These are good for faster markets that are trending nicely. However, when things get slow, as they are now, I like to get a little more bang for my buck. In this case, I will look at the either the PowerShares DB Crude Oil Double Long ETN or the PowerShares DB Crude Oil Dble Short ETN. Since oil prices are currently headed lower and are not showing any signs of strength, I like the double short DTO as a way to participate in any continued downward price movement.

When playing a leveraged ETF, it is important to understand that these instruments can move fast. Traders and investors must use appropriate risk/reward parameters. I typically like to take a position and trail a stop once per week, using the low of the weekly bar. In this case, by purchasing DTO (which rises as the price of oil falls) I can lock in gains each week that oil is moving lower, getting stopped out of my position only when oil has decided to reverse itself. This way, I do not have to know how low oil will go. I can simply participate in its decline for as long as it falls.

If I am able to close out this trade profitably, I can use the money to load up a storage shed full of survival gear. In the event the end of the world does come to pass, at least my neighbor will not have the satisfaction of saying, "See, I told you so."

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Anonymous Anonymous said...

Sir No-Slappz - Who Remembers?

Well, not very many, Andrew. The average joe today is more concerned
with pro-sports, his golf score, and/or whether or not to buy the kids that new cell-phone.
Geert Wilders says Europe is changing fast, muslim mosques are
popping up everywhere, and those "moderate imams" are invited to 'candlelite peace-vigils' in our churches across the USA.


Complacency Rules. Stealth Jihad Is Winning...Big-Time - and a comedian testifies, in Congress!

(Atomic Clock - Tick-Tock, Tick-Tock)

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12:51 AM  
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