4 Forces on Crude Oil Funds (四面楚歌)

Posted on April 25, 2020 Written by
crude oil funds

Crude oil is a commodity giant, similar to gold, physical price should not drop to $0.  However, it is possible for derivatives of crude oil (eg. futures contracts) to drop below zero under special condition, eg. US oil price for WTI was negative $37/barrel for May 2020 futures contract during the most fearful time in Coronavirus pandemic with the lowest energy demand due to lockdown in US and global countries.

For gold commodity, investor could buy physical gold bar (if price drops below zero) and hide under pillow or as display at home. For crude oil commodity, investors could not keep the explosive materials at home, therefore need to have storage place which would incur high cost during the pandemic period as oil storage level is near to its maximum level, may be full by mid of May 2020.  Therefore, investors who buy oil, even at positive prices, may not able to store the oil unless demand is more than supply, only then there is new room for storage.

Nevertheless, oil commodity is still a giant for longer term investing. However, there is no ideal way to invest directly in oil, each option has its own pros and cons. Typical ways are through oil futures trading, oil ETF (eg. USO, UCO, BNO, etc), energy ETF (eg. XLE, VDE, etc) or major oil & gas stocks (eg. Exxon Mobil – NYSE: XOM, Chevron – NYSE: CVX, etc).

Among all options, USO oil ETF (the largest crude oil ETF fund in the world) is a compromised way for investing in short term to mid term to follow oil price but investors may need to pay for monthly holding cost due to losses in contango (reversed is holding gain during backwardation, search for past articles by Dr Tee for details). Oil & gas stocks are more suitable for long term investing (benefiting from oil price recovery indirectly through business) but investors has risk of weaker oil & gas companies may go bankrupt during oil crisis with prolonged low oil price, therefore safer to focus in giant oil & gas stocks with strong business fundamental, continue to be profitable even during last 5 years of oil crisis.

USO (WTI oil ETF) and oil commodity used to have good correlation within about 3 years (longer than that, contango will show significant difference, reducing the capital gains). The past few months of high contango (especially for May 2020 futures contract) has resulted in USO value declining significantly. If oil futures continue to drop to negative prices for June 2020 and a few more months, not only USO may have risk of going bankrupt (NAV approaching $0), even many global oil & gas companies may disappear (Hin Leong Trading of Singapore is just an example of victim).

The correlation between USO and WTI oil is used to be this way:

Oil  (WTI) / USO (ratio is about $1/barrel oil = $0.21 USO)
=============
$20 / $4.20

So, when oil price drops proportionally in a gradual way within months or years (not within 1 day), USO (without high contango) may follow closely in this manner:

Oil  (WTI) / USO (ratio is about $1/barrel oil = $0.21 USO)
=============
$20 / $4.20
$15 / $3.15
$10 / $2.10
$5 / $1.05
$1 / $0.21

However, oil market becomes speculative during Coronavirus pandemic, negative oil price (happened only for 1 day) becomes the victim. USO suffered great loss in that day of negative price. USO has about 20-25% risk exposures for May 2020 futures contracts, probably could still sell at low prices above $0, therefore overall losses are about 25% due to rollover to June 2020 futures contract with higher prices. USO is in a better shape than other oil fund, eg. Bank of China oil fund (Yuanyou Bao – 原油宝) which selling May 2020 futures contract at closing market price of negative $37/barrel), suffering permanent damage, risk is much higher (this fund is stopped for new investors). Despite oil prices fell to negative region, actual transaction are fewer, prices for nearby month futures contract (Jun 2020) quickly recover, now back to a more normal price of $17/barrel.

USO oil ETF is the largest oil ETF, could quickly get new investors with new funds whenever there is a new in oil prices. Even so, USO suffers major correction over the past 1 month, the new correlation (with USO contango losses) as of now is

Oil  (WTI) / USO (ratio is about $1/barrel oil = $0.15 USO), new ratio based on 24 Apr 2020

=============

$17.30 / $2.57

So, for every $1/barrel oil price, it means USO has depreciated from equivalent $0.21 (before negative oil price) to $0.15 (after negative oil price), about 25% loss due to contango during that day with negative oil price (rollover from May to Jun 2020 futures contract with historical high price gap). If June 2020 happens again for negative oil price (may or may not happen again, only knows about a few weeks later), USO would suffer more losses again.

Whether USO (and other oil ETFs) may go bankrupt (NAV approaching zero) in short term or could survive and recover together with oil commodity giant in longer term, depending on these 4 market forces:

1) Coronavirus (Demand vs Supply)

How long would Coronavirus last and when US would restart economy are keys. This determines when demand > supply for oil. Now oil supply < demand during pandemic. Based on the current Coronavirus trends, there is earlier sign that US has reached intermediate peak of new daily cases but downtrend is not so clear. With 50 states of US take turn to restart the economy, there is high risk of second peak with more infection (this is reflected in Europe countries as well with restart of economy too early).

If there is no major change in policy, Coronavirus could fade away in June for US but this implies at least 2 more months of low demand for oil price. So, there is at least 2 months of winter time for low demand for oil in US and even the world (similar trends as US).

2) Oil Storage Limit (Demand = Supply)

In the near term (eg. June – July 2020 futures contracts), it is possible for negative oil prices to happen again, especially oil storage in US will reach maximum limit by mid of May 2020, market sentiments with great fear (四面楚歌) may cause abnormal negative oil prices again. 

By then, new oil produced has no more storage. So, demand = supply for oil when there is no more new storage. It means most oil & gas companies would lose more money (no oil = no income), there is high expenses to shutdown the oil well.  When more oil & gas companies go bankrupt or stopping production, naturally supply will be less (even demand is still low), oil price could be supported but it would take months for some weaker companies with little cash reserves to burn out first.  When company goes bankrupt, it is bad news for energy sector ETF (eg. XLE) as it is business fundamental dependent but it could be good news for oil market (survival of the fittest).

During bearish market, for farmers, historically there were cases of some pour away milk (or destroy vegetables), instead of selling at low prices or given free. This is a way to reduce supply to support the “commodity” price. The idea is the same for oil but it could be a challenge to throw away oil as it requires proper way to dispose the explosive materials, any spill would be a high cost to clean.

3) Political Economy (Invisible Hands)

US government may intervene when more US shale oil companies go bankrupt with over 6 months without much production (no place to store oil if producing anymore) if demand is low during pandemic. Collapse of oil & gas industry (if not saved by global countries), may start with US shales oil company with production cost of $50/barrel, burning money each month when oil price is below $20/barrel. After that, it may extend globally to OPEC and non-OPEC (eg. Russia with production cost of $20/barrel), eventually even Saudi with the lowest production cost ($5/barrel) may not able to survive.

Historically, oil & gas companies are strong supporters of local government, contributing to local economy, creating jobs. Therefore, there is high possibility that global stimulus plans (including “unlimited QE” of US) would save this key industry for collapsing in short term, so that it could recover again in mid to long term with natural demand > supply when Coronavirus crisis is over.

In fact, there is no need for demand > supply for oil price to goes up. As long as oil storage reaches a limit, no new drop of oil could be produced before it is being used, so oil price would be stable. This is similar to 0% car growth rate in Singapore, for each car deregistered, only then a new car COE (Certificate of Entitlement) may be issued, therefore the car price would not drop to zero. However, under extreme fearful condition, it is still possible for car COE to drop to $1 but car price would never drop to zero unless there is a derivate for car such as “futures contracts of Singapore cars”, only then it is possible to have negative prices, implying car buyer would get paid when buying a car.

If oil market is speculative (eg. negative oil price by right should not happen), when oil is at very low price, eg $10 or $5 or $1/barrel, then shorting won’t help much as even USO may go bankrupt, then not much “meat” of profits left. If so, the “invisible hands” (big boys) may start to turn to long oil price to profits again from oil, but using reserved direction.  So, who are these invisible hands? It could be big investment funds (non-oil related), major oil producers themselves (covering the losses in oil prices with investing in giant oil & gas stocks at very low prices). In the next 6-12 months, we may know who are the big gainers in oil market, then invisible hands would be clearer. Usually they could affect the oil prices, therefore there could be major news in next few months if they decide to turn the oil market around again.

4) Size of Oil Funds (Strength of Fund)

New global investment would keep on coming to oil ETF funds (including USO, the largest and most popular fund, despite it has contango issue with high holding cost), especially whenever oil prices coming to new low. The reason is there is no other better way to invest in crude oil, unlike some people could buy gold or silver and keep at home for price appreciation one day.

If USO losses in contango is supported by new funds (entering at lower unit price), the fund still has positive NAV, could still continue follow the oil prices for possible recovery. It means this is a mind game between high rollover cost (monthly holding cost) vs tremendous high potential of oil prices (when demand > supply with no market threat one day). If USO could last until oil prices reverse the mega trend (from the worst case, could be negative $37 or even lower), then the high rollover cost of contango is a good issue to have because capital gains from higher oil price could offset this holding cost. However, an USO investor may not expect 100% capital gains when oil prices recovers from $15 to $30/barrel as there was cost incurred during the holding period.

However, when fewer new funds come in, USO continues to lose in contango for 6-12 months with negative oil prices or large monthly prices gaps, then possible even for USO to go bankrupt but this will be a very severe market condition as it means many oil & gas companies may also bankrupt at the same time (even XLE would have serious correction, many oil & gas stocks would disappear).  Before that, smaller oil funds which are less popular would go bankrupt first if could not last through the winter of high contango with low oil prices.

USO plans for 1-for-8 reverse share split (stock consolidation to 8x higher price by reducing the number of shares), price gap from $0 (psychological limit) would be further, giving more rooms for contango to erode the prices with monthly holding cost. In addition, USO also could rollover to 2 months later, not just to next month of futures contracts which could avoid high right of negative oil prices. However, if so, correlation of USO and oil commodity would be weaker, may not benefit fully when oil prices recover in very short term (eg. certain unexpected good news from major forces mentioned).

In short, size does matter for oil ETF. USO could not be 100% protected as it is based on derivatives of oil futures contracts, therefore it is not the same as oil commodity which is a giant. USO is a conditional giant when the rising oil prices could offset the contango cost. If contango cost is more and faster than the rising oil prices, then any oil funds (including USO and many other oil funds) or even oil producer countries (not just companies) have to go bankrupt.

===============================

In short, whether USO and other global oil ETF funds or even many oil & gas companies may go bankrupt depends mainly on 4 factors above, a power struggling among big funds, invisible hands, Coronavirus and oil storage limit. If USO could still survive and reverse the trend, due to recent contango losses, the capital gains (eg. when oil price is over $30/barrel again) would be less. For an investor entering USO around $4 with oil price around $20/barrel, after 25% contango loss (could be more), may need to wait for oil price to recover to about $30/barrel to breakeven.

It will be a mind game among the earlier 4 market forces to determine up and down and mega direction of oil prices. Oil commodity is still a giant but it has become a tool for speculation, behaving in an abnormal way. USO oil ETF is based on oil commodity derivative, not a giant during contango period with low oil prices, especially during negative oil price which is very abnormal, mainly due to complex interaction of 4 market forces.

So, investors of oil funds must understand own personality, how much risk tolerances (any diversification or position sizing or cut loss measure) could take as crude oil is a high volatile and speculative market due to unpredictable market forces, especially during this period. Hope the sharing on oil market has helped readers. Please make your own decision for investing.

There is no need for investors to take risk to invest in crisis commodity or crisis stocks. There are many giant global giant stocks which could continue to grow in business and remain profitable during Coronavirus pandemic. Dr Tee spends about half a day to prepare this article as some readers may be worrying about the crude oil market, including chance of survival of oil ETF funds. When I finish the article, it is about 8pm, very touched to hear the cheering sounds all over the neighbourhood, motivating one another during this pandemic crisis. Even we may not know when the health or financial crisis may be over but we have faith that it will be over one time, so we need to ensure we are safe during this period of uncertainty, staying healthy by exercise more and enriching mind with valuable investment knowledge.

==================================

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Myth of Negative Oil Price (扑朔迷离)

Posted on April 21, 2020 Written by
negative oil price

US oil (WTI) May 2020 futures contract price crashed yesterday (20 Apr 2020 is the last day before May 2020 US oil future contract expires) to negative $37. Global investors may be confused, why it is possible for oil price to drop to negative, does it mean oil investment fund will go bankrupt? Global consumers may be excited, does it mean petrol from gas station is free from now? Here are the details to uncover this myth.

An oil futures contract is an agreement to buy or sell a certain number of barrels set amount of oil at a predetermined price, on a predetermined date.  There are 2 main oil futures contracts: WTI (mainly US oil prices) and Brent (overseas oil prices, outside US). Oil investors would choose futures contracts over spot contracts which requires delivery / storage of physical crude oil in barrels which is not practical. 

An alternative is investing through oil ETFs (eg. USO, UCO, DBO, BON, etc) without actually owning a futures contract by investor (maximum risk is limited to investment on ETF), aiming to follow the oil price movement for capital gains. However, these oil ETFs are not suitable for holding long term (eg. more than 3 years) as there is high rollover cost for futures contracts, a strategy by oil ETF fund manager to keep the oil investment without need to physically store the oil. When futures contracts prices for later months are higher than nearby month, it is called “Contango”, would incur additional cost, when adding up over long term, could be significant to reduce the potential capital gains in actual oil price appreciation. Reversed process is called “Backwardation” which oil ETF would have positive rollover yield due to lower futures contract prices for later months.

In general, when oil price is volatile in short term (eg. up and down 20%-50%), these rollover cost or return may not be obvious. However, in May 2020 futures contract, there is a serious contango with low demand for oil price (due to global lockdown for Coronavirus, especially in US which affects WTI oil price) with over-supply of oil (global oil producers’ action to limit the production is not fast nor strong enough). Due to nearly full storage of oil in US, a buyer would have problem with high storage cost if buying in May. With tremendous sell by oil ETF for May 2020 futures contracts (rollover to buy later months futures contracts), oil price drops below $0 to negative $37, technically sellers are paying to buyers to collect the oil which is abnormal, never happened before.

This abnormality of negative oil price is a historical event, a combination both black swans of Coronavirus (low oil demand) and crude oil price war (high oil supply), breaking down near the worst time of US with severe Coronavirus condition in Apr 2020.  The nearby or front month futures contract now is Jun 2020, WTI oil price is back to a more normal of $21/barrel (usually within $5 difference with Brent oil price which is around $25). So, global consumers may be disappointed as gas station won’t give free petrol unless this negative price is over a longer period of time.

The same negative oil price may or may not happen before expiry date of June 2020 futures contract as oil investors have 1 more month to observe the changes in oil price demand and supply, especially the Coronavirus condition which affects the US economy when it be restarted. The production cut of global oil produces from May 2020 although limited, may help to a certain extent.

negative oil price

The global Coronavirus condition is improving with 5 days consistent downtrend in number of new daily cases. US has also shown a gradual downtrend in new daily Coronavirus cases over last 1 week which is an weak positive signal, if better results are seen by end of Apr 2020, more states in US would restart the economy. Most Americans drive, so when lockdown is stopped, US oil price (WTI) would recover naturally with more energy consumption. Trump may also consider to buy more unwanted US oil at low or negative prices to top up the national oil reserves. Europe countries have significantly lower number of new daily Coronavirus cases, lockdown may gradually be loosened, combined with more manufacturing activities in China, global demand for oil price would gradually pickup by summer. Singapore has a surge in number of Coronavirus cases over the past 1 week but mainly this is within foreign labour dormitories, risk of community infection is in fact lower with stricter partial lockdown.

Global consumers likely could continue to enjoy cheaper petrol prices but not free oil as the negative oil price is a rare product of 2 black swans of Coronavirus crisis and oil price war crisis. If oil prices are below $20/barrel over a longer period of time (eg. a few years), weaker oil producers countries would start to go bankrupt (see past example of Venezuela, even oil price was above $50 a few years ago), following by US shale oil producers (production cost is around $50/barrel), then Russia (production cost is around $20/barrel), finally only Saudi (despite production cost is $5/barrel, there is high national expenses, need much higher oil price to sustain the normal lifestyles).

So, what are the options for global oil investors? Oil ETF such as USO has reasonable correlation to WTI, eg. when oil price surged from $20 to $28 a few weeks ago, USO also went up by similar magnitude of 40% in short term. With yesterday negative oil price, USO is only partially affected as most contracts are already rollover to later months, USO is corrected by around 10%.  USO has some flexibility to rollover future contracts to 2 months later, instead of to nearby month (more volatile, negative oil price may have chance to happen again by 20 May 2020 before June 2020 futures contracts expire) but this would affect the tracking of WTI short term oil price (in exchange for smoother price movement). USO is not suitable for holding long time due to Contango effect, so for oil investors who see significant appreciation (eg. 20-50%) in future oil price in short to mid term (less than 1 year), may consider to take progressive profits as rollover cost is inherent to oil ETFs (similar to holding cost), hard to find other better way to invest in oil prices.

Oil investors may also consider indirect way of investing through energy ETF (eg. XLE, SPDR energy sector ETF) which invests in oil & gas stocks with reasonable correlation to oil prices but won’t be easily affected by such abnormality of negative oil price (XLE was only down by 3% yesterday with negative oil price).

A better oil investment option could be to focus in global oil & gas giant stocks (44 of them based on Dr Tee giant criteria), many are midstream oil 7 gas stocks, eg. storage or delivery of oil which is a more defensive business segment. Storage of oil is a consistent profitable business, some companies are strong in business despite oil & gas crisis over the past 5 years. Oil delivery business could be temporary affected due to lower demand of oil. These midstream oil & gas stocks could even pay consistent dividend, suitable for holding during low optimism of stock prices, waiting for recovery of oil price for potential capital gains indirectly.

Of course, one may do futures trading directly without oil ETF or oil & gas stocks. However, futures trading is speculative in nature for shorter term, may not be suitable for retail traders. Even Singapore oil trading company, Hin Leong, could go bankrupt after losing US$800M in oil futures trading. As a result, 3 major banks (DBS, OCBC, UOB) in Singapore would need to set aside provisions for this non-performing loan (NPL) but risks to these banks are lower than 5 years ago when more weak oil & gas companies were in trouble (eg. Swiber, Marco Polo Marine, etc).

Sharing above is for educational purpose. Readers have to make own decision after independent thinking, especially on risk tolerance level, always having the option not to consider any investment in crisis sectors with business seriously affected.

There are other sectors which business are relatively strong, eg. technology (especially internet related), consumer staples, healthcare, property, etc, many global giant stocks (over 1500) could be considered. Due to the uncertainty in Coronavirus condition (despite downtrends in last 5 days for world condition), stock investors may need to plan for capital allocation (investment in batches) with a portfolio of giant stocks supported by strong fundamental business, so that one could invest with a peace of mind, no need to worry of abnormality such as negative oil price.

==================================

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10 Bullets of Crude Oil USO ETF Investing (十重天机)

Posted on March 31, 2020 Written by
Crude Oil ETF Investing USO

If you stayed till 2am Singapore time last night, you would have chance to trigger the first silver bullet, entry to buy WTI crude oil below US$20/barrel (only lasted for less than 1hr, heavy correction of 9% in 1 day) through USO oil ETF. This is last 18 years low for crude oil, mainly due to combination of crude oil price war and low demand of crude oil during Coronavirus pandemic, a rare crisis with 2 black swans.

I have shared this rare opportunity of crude oil crisis with low optimism, the first target US$20/barrel in earlier post a few days ago. At this price, crude oil is much cheaper than mineral water of the same volume (about US$50/barrel or US$0.30 / liter if you are more used to this unit of 1 liter bottled water price). Does it make sense?

If you miss the opportunity last night, not to worry, there could be 10 levels of opportunities (十重天机) ahead. Let’s learn together from Dr Tee on how to trigger 10 silver bullets for crude oil investment.

Over the past 3 decades (with multiple global financial crisis in between), crude oil (WTI) price was ranging from the lowest of about $10/barrel to $140/barrel. For simplicity, we may take $1 – $100 as possible range of crude oil price for next 10 years.

$100 = High Price (Bullish Economy / high optimism stock)

$50 = Fair Price (Average Economy / mid optimism stock)

$25 = Low Price (Bearish Economy / global stock crisis with low optimism)

WTI Crude Oil Historical Prices

Below $25/barrel with very low optimism, an investor could position in 10 opportunities for investing with 5 levels of crisis (from severe to disaster, prices may not really follows the crisis, just an illustration of how crisis causes more downside of crude oil).

Initially, prices would move in downtrend (more suitable for long term value investing with contrarian approach or even short term trader for shorting when breaking below the support), 5 possible levels of crisis (Level 1 is confirmed):

$20 = L1a = Price War Crisis (record on 31 Mar 2020)

$15 = L2a = Coronavirus Crisis (low demand 6-12 months)

$10 = L3a = Global Financial Crisis (1-2 years bearish economy)

$5 = L4a = Great Depression (Coronavirus last over 1 year without vaccine, most human in the world stay at home)

$1 (or even lower price, $X) = L5a = Nearly end of the world (no need to have crude oil or a smart scientist found a way to get free or cheaper energy source)

After reaching the bottom (no one knows, only history could tell, $X-$20, may not go through all the 5 levels), then it will recover again in a reversed way (uptrend prices):

$1 = L5b = recovering from “human crisis”

$5 = L4b = recovering from Great Depression

$10 = L3b = recovering from Global Financial Crisis

$15 = L2b = recovering from Coronavirus Crisis

$20 = L1b = recovering from price war

Subsequently, crude oil may move higher to normal range of prices, between $20 – $100+/barrel, averaging around $50/barrel. For those who are patient with strong holding power of over 3 years, there is a good chance of capital gains in future if one believes the 5 levels of crisis above are possible but low chance. Even if price war continues, at $20/barrel, Russia would start to lose money as its production cost is $20/barrel. Saudi could last longer as production cost is only $5/barrel but high national expenses won’t allow oil price to remain at low level for too long and other OPEC / non-OPEC countries may go bankrupt at this price. US, China and big funds in the world may also use the opportunity of low oil price (below $20/barrel) to buy for storage as strategic energy weapon, or simply sell higher price in future.

Some traders may take action to short when $20 support is clearly broken down. Some investors (contrarian type) may take action to gradually buy at historical 18 years low price (perhaps next target will be $15, $10, $5, $1, etc).

Question is will crude oil drops to $0 and will human forever stay at home more than 1 year with Coronavirus?

If not, it means crude oil is a commodity giant, every crisis at low optimism is an opportunity. There are 3 different strategies, counter-trend and/or follow-trend. Assuming, all 5 levels of crisis (although unlike, actual case could be between L1-L5), then one may apply multiple entries, eg (10 times x 10% capital), (5 times x 20%), (2 times x 50%) or simply 1 x 100% (1 bullet, could be due to limited capital).

1) Counter-trend (eg. 5 x 20% in downtrend L1a-L5a)

1.1) Fixed quantity method (eg. 100 units for each price)

Average price

= ($20 + $15 + $10 + $5 + $1) / 5

= $10.20

It means there is no need to guess the levels of crisis, simple average down could get about $10/barrel easily. This is 50% discount compared with someone with 1 entry at $20 with 100% capital.

1.2) Fixed capital method (eg. $100 per entry)

Total units = ($100/$20) + ($100/$15) + ($100/$10) + ($100 / $5) + ($100 / $1) = 142

Average price = ($100 x 5) / 142 = $3.50

This average method allows more units purchased at lower prices, therefore achieving a even lower average entry price.

2) Follow-trend (eg. 5 x 20% in uptrend L1b-L5b)

Average price will be same as counter-trend, depending on which levels are experienced.

3) Counter-trend + Follow trend (eg. 10 x 10% in downtrend L1a-L5a + uptrend L5b-L1b).

Results will be same as above but with more entries (more diversification), depending on which levels are experienced.

Assume, only L1a-L3a ($20 – $10) with 3 levels of crisis, one could still get $13 as average price with fixed capital method over 3 entries. This method is different from dollar cost averaging which buys all the time (low and high prices). This method requires low optimism to trigger multiple entries, high optimism to trigger multiple exits (future topic when market is bullish again to sell one day).

Learn further from Dr Tee for both trading (eg. shorting crude oil in bearish market to make money) and investing (eg. buying crude oil in bearish market with value investing). Contrarian investing has risk of buy low get lower, therefore needs to be supported by giant investment (eg. crude oil, gold, property and over 1500 global giant stocks with strong business fundamental). An investor may also integrate trading into investing, only enter during uptrend phase but there is a risk of missing out (eg. price may touch $20 and rebound forever). So, align the strategy with own personality, either trading or shorting, there are many ways to profit from current crude oil crisis and global stock crisis.

Ideally, buying giant dividend stocks (about 100+ in the world) at low optimism prices with high dividend yield is even better than crude oil investing because one could collect over 5% dividend return in next few years (better than fixed deposit in bank with 1+% interest rate) while waiting for winter time is over, applying similar methods of entries but first silver bullet to trigger (first entry) will depend on unique optimism level of each stock, this is 1 of 55 investing styles developed by Dr Tee.

What is the chances of winning in crude oil for entries below $20/barrel if one has holding power of over 3 years (typical global financial crisis is 1-2 years)?

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3 Strategies for Crude Oil ETF (USO) 大小通吃

Posted on March 29, 2020 Written by
Crude Oil USO ETF Strategies

When WTI crude oil falls below US$20/barrel during current Crude oil price war (between OPEC and non-OPEC), price is cheaper than mineral water (same volume) for some countries, it is attractive to buy USO (WTI oil etf) for long term, I am not surprised if Jim Rogers (long term commodity lover) may be accumulating when crude oil prices are at low optimism.

OPEC (Saudi, etc) and Non-OPEC (Russia, etc) could not sustain for long term (over a few years) with WTI < U$20, despite low production cost (about US$5/barrel for Saudi, about US$20/barrel for Russia) as national expenses of oil produces countries are also high, money from crude oil is main source of national revenue.

One may leverage on crude oil crisis, either investor or trader could benefit if aligned with own personality. WTI and Brent crude oil prices correlate well, differences are about a few dollars per barrel of oil prices. When Brent is below US$25/barrel, WTI would be near to US$20/barrel, so either price may be used for analysis, then easy to take action through USO (WTI oil ETF).

Here are 3 main strategies to invest in USO crude oil ETF:

1) Long term investors

1.1) Contrarian investors

This is suitable only if one could hold more than 3 years, use low optimism and strong holding power on a commodity giant (oil won’t drop to $0, similar to property or land, also a giant by default). Risk management includes diversification (not just invest in crude oil) with position sizing and progressive entries (eg. 10 times x 10%).

Assuming $20/barrel is the first target (use either WTI or Brent for analysis, be consistent), trigger the first buy, then when drop to $15, $10, $5, $1 (similar to car COE drops to $1, assuming something nearly impossible happens), trigger possible more entries until extreme low optimism (no one would know the lowest point but likely not $0).

Saudi and Russia are pressing the oil price down but US & China and global giant funds, may standby to buy low as national reserves. Crude oil in the world is limited in supply, therefore it has its intrinsic value, especially world needs crude oil for energy (more demand when Coronavirus crisis is over).

1.2) Trend-following (short term traders / long term Investors)

After reaching lowest point one day (only history could tell), crude oil would start to recover. The same group of investors may use the remaining capital to add more positions (still low optimism). Traders who long would also join at this phase for short term trading

Since the market trend now is bearish, trend-following investors or investors who long the market would choose “Wait” action.

2) Short term traders (shorting)
This is suitable for short term trading, aligning with current bearish trend, aiming for every major support, eg $20, $15, $10, $5, etc (these levels are just for examples)… whenever breaking below, shorting would be initiated. Traders protected by position size and cutloss (risk could be high for leveraged trade in a volatile market). S&P 500 trend over the past 1 month of falling 30% following by over 10% of weekly gain is a good example of intense fight between bull and bear.

So, one could “Buy” (contrarian investors), one could “Wait” (trend-following investor or traders who long), one could “Short” (short term traders), all 3 actions are correct if aligned with own personality. If one follows others to take action, then all 3 actions could be wrong.

Since crude oil is a giant, crisis in price is an excellent opportunity to invest with at least 3 strategies. Learn from Dr Tee 4hr Free investment course on how to take actions in crude oil and global giant stocks.
Register Here: www.ein55.com

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Dr Tee Investment Course (Stock, Property, Commodity, Forex, Bond)
Filed Under: Commodity Market, Market Cycle Investing, Market Optimism, Market Outlook Tagged: , , ,

Investment Strategies for Exchange Traded Fund (ETF) – Low Risk High Return

Posted on September 16, 2016 Written by

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Exchange Traded Fund (ETF) is getting popular among the investors, total global asset value has exceeded US$3 trillion.  ETF has the best DNA of both stocks and investment funds.  ETF is an investment fund which can be traded like stocks, having the stability of investment funds (risk diversification over a large portfolio) and flexibility of stocks (buy / sell in stock market) with minimal fund management fee.

There are thousands of ETFs globally over various investment markets, eg:

  • Stocks: SPY, STI, QQQ, RSX, XLE…
  • Bonds: SHY, TIP, AGG…
  • Commodities: USO, GLD, DBA…
  • Currencies: FXA, FXB, FXC…

Famous ETFs providers are SPDRs, iShares, PowerShares, ProShares, Vanguard, etc.  For stocks ETFs, it could be related to stock indices, sectors or a group of stocks selected by the fund managers, either actively or passively managed.  Some ETFs could be operated inversely (shorting, eg, PSQ – ProShares Short QQQ ETF, higher ETF price with falling in Nasdaq 100 stocks) or with leverage (Ultra, eg. SSO – Ultra S&P500 Proshares, 2 times leveraging of S&P500 stock index movement).

An investor must learn how to choose the top 10 global ETFs (low risk high return), aligning with own personality and investment goals.  Fund managers could help in what to buy, diversifying the investment over a large portfolio to lower the risks.  For those with limited capital, ETF is a low-cost way of investment diversification, 1 ETF is equivalent to a portfolio of many stocks with good businesses.  It is also easier to monitor 1 ETF, comparing to monitor the entire index with hundreds of component stocks.

S&P500 stock index is a common fund of choice for ETF because this is an investment in US, No 1 economy in the world, through 500 top US stocks.  SPY is a popular ETF by SPDR on S&P500.  Let’s learn how to buy low sell high for medium term trading.  Currently S&P500 is near to historical high price, long term optimism is moderate high, not suitable for investing.  However, for medium term traders, each correction of mid-term optimism (see chart below) below 25%, creates a new trading opportunity to buy low.  The reward to risk ratio for mid-term trading is around 2:1 (66% upside vs 34% downside, due to 34% Optimism).  Over the past 4 years, SPY ETF has appreciated by 72% due to capital gains in S&P500 stocks.  It is relatively safer to trade SPY ETF (through S&P500) compared to trade 1 US stock.

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Filed Under: Market Cycle Investing, Stock Market Tagged: , , ,