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The Future of Oil

I haven't written an article in a matter of months, and to those who still check this blog I apologize. It is not that I do not want to write, but just that I didn't feel I had much to say that was constructive or useful. I, as most, have been at a loss over the past months as stocks have plummeted and the financial crisis has worsened. While I still have little insight into the equity market, I do feel that there is a situation developing within the oil market.

One of the few things I was sure about 6 months ago was that commodities, especially oil and gold, were in a bubble brought on by inflation worries and a rush of investor money fleeing the stock market.We have watched oil prices move from highs around $150 per barrel to a current spot on the NYMEX of crude oil at $39.82. That's more than a 73% decrease in price, in just a few months. Gas prices went from an average over $4 per gallon to a national average well under $2. No one is talking about oil anymore, unless they are commenting on its epic slide.

I think that oil is a BUY. Oil, while once over-valued, has gone below what most were calling fair value (between $60-80 a barrel) and has continued to fall, even with talks of an OPEC intervention. While I knew that oil's very short term demand was more elastic than many guessed, as we can see by the fall in oil's price, its longer short term demand is not so. It will take years for us to get off oil, and we are no where close currently. This huge decrease in price is going to stop advancement of alternative energy for a while. Prices will begin to rise again, and there is nothing stopping oil returning to previous levels. With OPEC slashing supply, prices will eventually rise. Even if oil only returns to fair value, it represents a $20 per barrel increase. This is a more than 50%. While I bet against oil and gold when the commodities were over-priced, I will now bet with oil because it is undervalued. Unlike stocks, oil does not have mortgage debt exposure. It has intrinsic value, and there seems to be little long term downside, as oil will be in demand for at least another 20 years.
I see a possibility that oil could drop to lower levels, possibly even below $30. However, I doubt this, and I think there is a much greater chance that oil prices rise. This is why I think oil is a buy right now, because I believe oil is nearing its trough.

Ways to Invest Without Writing Futures Contracts

The best way to gain exposure to oil, in my opinion, is through an ETF. Though there are some fees, it greatly reduces complications of writing contracts, and is relatively liquid (especially the ones I choseto highlight). The best ones I've researched:

Ticker: OIL (NYSE)
Full Name: Goldman Sacs Crude Oil Total Return ETN
YTD High/Low Price (% change): 86.90/21.68 (-75%)
More Info

Ticker: DXO
Full Name: PowerShares DB Crude Oil Double Long ETN
YTD High/Low (% change): 28.78/2.30 (-92%)
More Info

Ticker: DBO
Full Name: Powershares DB Oil Fund ETF
YTD High/Low (% change): 54.93/18.22 (-66.83%)
More Info

Let me know what you think.

Will the Governments Move Work?

Over the weekend the US Government, led by the Federal Reserve, The Treasury Department and Federal Finance Housing Agency, took over Fannie Mae (FNM) and Freddie Mac (FRE) in a move that shows unprecedented central mingling within the world of finance. Fannie Mae and Freddie Mac, which were already semi-public institutions were essentially forced into the deal which gives control to the US Government through preferred stock. In turn the government will prop up the mortgage lenders who's books are swamped with debt.
FNM and FRE are down close to 90% today, as they both are trading under a dollar a share. Henry Paulson, Treasury Secretary Henry Paulson stressed that the bailout was to prevent a massive, potentially worldwide financial melt-down, not to bail out investors who had made a poor bet on the companies, or who believed that the fact FNM and FRE are government backed meant their investments were without risk.
The question is now whether this move is enough to turn the markets around, speed stocks to recovery and move our economy toward productive growth. Though stocks surged today, up almost 3% today, there still remains great uncertainty whether this move will actually solve the problems we face today.
What do I think? Honestly, while I think the move is a needed one to prevent a much larger problem, I do not believe that our economy will be magically cured over night by the move. Home prices are continuing to fall, and until they trough and begin to recover, defaults will rise, write-downs will mount and the overall economy will be shaky. I do, however, think that this could be the bottom for some stocks, if not the market in general. Last time the government made a large, unprecedented move to keep the markets afloat, after Bear Sterns, we enjoyed a few months of higher levels of trading before the bears came again. I think that we will definitely see stocks trading up, but they may actually stay high this time. The dollar is recovering, but it is still low enough to keep exports high, and commodities, especially oil, are trading down due to crack downs on speculation in these markets.
Overall, I think that this will be very interesting next few months. Hopefully stocks will recover, banks will start to find a foothold and buying opportunities will present themselves. The main indicator I will be watching is home prices and defaults. If you think you see a bottom in prices or a top in defaults, I'd say that's the time to jump in. I think home prices will continue to drop, however, though not as much as predicted in my last article because this move by the government will stabilize the housing market. I'm gonna watch closely and wait for this to happen.