Oil prices are falling again and are closing in on $40 per barrel. What does this mean for energy investments, and should you buy, sell or hold if oil falls even further?
As always, don’t panic. Oil is a requirement in modern society, and while demand and supply will always be in flux, it will ultimately bounce back. Do not sell out. If you recall 1998, oil fell to $10. Losers sold. Winners bought and made fortunes. The one thing that oil has that few other items have is eternal demand.
Let’s look at the charts first. I generally don’t use technical analysis, but when it comes to gold and oil prices, I find the charts can be instructive and supplement the fundamentals.
Courtesy of Decision Point and StockCharts.com, we see that oil prices burst through support in the mid-to-low $40s and the next support is at $35. I think it is entirely possible we will see that price. We could go lower.
What happened from a fundamental standpoint? Folks, it is always about demand and supply. Always. The U.S. has doubled production over the past six years. Canada, Nigeria, Algeria, Iraq, Saudi Arabia and Russia are also pumping like mad. Supply is overheated. Meanwhile, demand is weak thanks to China and parts of Europe.
Supply exceeding demand means prices fall.
Now, the price of oil is not going to stay here. It could even drop lower, but at some point it is going to go back to at least $65. My suggestions is to start buying small positions in any of the large-cap oil names. These include Exxon Mobil (NYSE: XOM), Kinder Morgan (NYSE: KMI), Chevron (NYSE: CVX), Schlumberger (NYSE: SLB), ConocoPhillips (NYSE: COP) and Williams Companies (NYSE: WMB).
Or you can do what I have done, which is to purchase the Energy Select Sector SPDR ETF (NYSEArca: XLE), which has those stocks and many more.
Here’s the big advice: If oil falls under $20, buy with both hands. Oil is going to come back and you can get great values at that price, even on oil itself. Do whatever it takes to raise capital and buy, because you won’t have a chance like this again for 20 years or more.
What about trading actual oil prices? You can take that route, but be warned that it’s not for the faint of heart. If you want to go on the long side of a trade, use the United States Oil Fund (NYSE: USO). The ProShares Ultra Bloomberg Crude Oil ETF (NYSEArca: UCO) tracks twice the return of Brent crude, so it’s like doubling down on the long side. You can also gamble big time by purchasing VelocityShares 3x Long Crude Oil ETN (NYSEArca: UWTI), which offers three times the West Texas Intermediate Crude Index’s returns.
Want to play the short side? DB Crude Oil Short ETN (NYSEArca: SZO) tracks the inverse daily performance of the Deutsche Bank Liquid Commodity Index. The DB Crude Oil Double Short ETN (NYSEArca: DTO) tracks 200% of the index.
No matter what, be careful if trading oil directly. I much prefer taking bits and pieces of long positions as oil prices fall. Over time, you are going to be rewarded.
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