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.

What To Do Now

While watching the market tank everyday-many days opening high and then crashing after a couple of hours-has me down. As I said before, I thought that the worst was behind us, and I was wrong. Since I started sharing my long term picks on this site (see lower left) The S&P 500 is down more than 5%, but the worst part is that the market had jumped over 7% before losing it all and then some. This makes me sad because I feel like a optimistic dumb-ass. I lost about 15% on holding Citigroup (C) long, and finally closed out a little while ago, feeling that I might as well cut some losses. I also closed out the long position on Vale ADR (RIO), as I felt bears were swamping almost all stocks, and I'd like to preserve some gains.
However, I did add one long position to my portfolio: Wal-Mart (WMT.) As I have talked about before (See My recession article ) I think WMT is a great play when the economy is doing ugly things. While low consumer sentiment, high unemployment and even higher gas prices may seem like big negatives for a retailer, WMT is different. Wal-Mart provides really cheap, yet quality goods, which is good for people who feel the economy is doing poorly and don't have jobs but still need food and toilet paper. Also, WMT has pretty much everything you could need at one location, and so for those who don't feel like driving around on $5 gas it serves as a one stop shop. All of these bode well for WMT. They keep costs low, drive away competition because of it and when people are short on cash, look incredibly attractive when it comes to buying the necessities. They also look good to me as a company that can survive these dire times.