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In recent times, one of the common questions I get from my friends and readers is whether now is a good time to buy oil, and which products they can use to gain exposure to oil.

I hope this article will shed some light on these questions, through the sharing of my own personal views on the matter.

oil extraction

 

WHY THE SUDDEN INTEREST IN OIL?

Oil prices have fallen more than 70% from its highs of $110 per barrel in 2011 to a low of $27 per barrel early this year.

The drop came after OPEC (a group of some of the biggest oil producing nations in the world ) decided to continue pumping the same amount of oil despite clear signs that there was too much supply in the market. Other factors that contributed to it include weaker demand for oil (especially in China), the rise of U.S. shale oil producers and also the upcoming oil exports from Iran (after sanctions were lifted).

IS THIS SUSTAINABLE?

The International Monetary Fund warned last month that most countries in the Middle East — including Saudi Arabia, Oman and Bahrain — will run out of cash within five years if oil prices don’t rise above roughly $50 per barrel.

cost-to-produce-one-barrel-of-oil

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. One likely reason why OPEC has not done so is to keep these low prices to drive US oil producers out of business (especially the Shale oil producers), which will give them back their market share. However, these low oil prices have also been hurting the Saudis (they have been suffering large current account deficits and have been selling other assets to finance their government spending).

So, who will blink first?

 

IS NOW A GOOD TIME TO BUY OIL?

Looking at the long-term chart of oil dating back to 2001, I feel that oil is now in a “Buying Zone” between $17-$35, which is a good area to gradually accumulate oil products.

My long-term target (within the next 3-5 years) is in the “Value Zone” of $60-$90, which presents an upside of 50-300% returns.

To date, I am holding about 5% of oil in my portfolio, and I am planning to add more over time.

crude oil 210216

WHAT PRODUCTS CAN YOU USE TO “BUY” OIL?

1. Buying Oil & Energy ETFs
The two most popular ones are USO and USL, listed on the NYSE.  These oil ETFs more or less track crude oil prices but it is not a perfect correlation due to errors. Both have their pros and cons, so it might be a good idea to hold both for a bit of diversification. Other options include the Energy ETF (XLE) which consist of companies in the energy sector, or other Energy ETFs such as DBO, OLEM or OIL.

2. Buying Energy-related companies
Another option is to go long on energy companies, since these companies will be correlated to oil prices. However, it is important to note that stocks are also affected by the stock market cycle, which means they may not perform that well if oil prices go up but the stock market goes down. In the US market, you have companies like Exxon Mobil (XOM), Phillips 66 (PSX), COP, CVX, etc… For the local market, you have companies like Keppel Corp (BN4), Sembcorp Marine (S51), etc.

3. Trading Derivatives: Futures, Spot, CFDs, Options
These instruments are a bit more complex, and are more commonly used for short-term trading, since there are associated costs for longer holding periods, or high volatility caused by factors outside the oil price.

Sources & References:

http://www.nasdaq.com/article/think-twice-before-buying-a-top-oil-etf-cm433169
http://money.cnn.com/2015/11/24/news/oil-prices-production-costs/
http://money.cnn.com/2015/10/25/investing/oil-prices-saudi-arabia-cash-opec-middle-east/index.html?iid=EL

market overview 221115 synapse trading

Since the post-2007 crash recovery starting in 2009, how have the markets fared?

Stocks, represented by the S&P 500, have steadily climbed, gaining an impressive 130% over the 6+ years.

Commodities, represented by oil, silver and gold, did not fare so well.

Oil peaked in the first half of 2011, consolidated for about 3 years, then made new lows in 2014.

Silver and Gold peaked in late 2011, then steadily declined all the way till today, giving up almost all its gains since 2009.

As the Fed gets ready to raise the interest rates, this is likely to give a boost to the US dollar, which will further suppress commodity prices. For oil, this is especially bad, since there is already an oversupply forecasted for 2016.

A higher interest rate will also bring down bond prices, ending the 30-year bull trend, and in months to come, act as a drag on stock prices. This means that the stock market is a ticking time bomb.

If all these happens, we will have a scenario with:

  • Bullish US dollar
  • Bearish oil, gold, silver, commodities
  • Bearish bond prices
  • Bearish stock prices
  • Bearish economy?

That would be a pretty gloomy deflation scenario. 🙁

What is my current portfolio strategy?

Stay tuned for my monthly portfolio update (November 2015) and current portfolio strategy at the end of this month!
Subscribe for our mailing list to receive it in your mailbox! 😀
https://synapsetrading.com/resources/the-7-best-kept-secrets-of-professional-traders/

comparison 210713

Looking back at the past 6 months, we can see that the top performers were US equities and the USD/JPY, which is why we have been taking medium/long-term positions all these while on the USD/JPY.

Gold has been a good medium/long-term short, until it found support near the 1150-1200 zone. The Singapore market has been rather choppy and range-bound, which is why we have been doing swing trades to capture price swings.

But so far, the best trades have been intraday scalping trades on the EUR/USD and GBP/USD, because in a range-bound market as such, it provides many opportunities to trade both ways throughout the day.

^sti 210713

Trading is a systematic way to get rich, but only if you have the discipline and skills to do it progressively (not an overnight affair), and it is certainly not gambling/punting (save your gambling urges for casinos in MBS).

For my next sharing session this coming Wednesday, I will reveal why professional traders in funds choose not to use indicators, and how they time the market using charts and behavioral analysis.
Register here: http://www.eventbrite.sg/event/7201996365

P.S. If you are still hesitating about signing up for our training program, do make up your mind before the early bird offer ends!