Category Archives: Commentary

Why Oil Is A Broken Market Ripe For A Short

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Summary:

  • Oil is trading at a premium based on historical data points.
  • U.S. supply is beginning to come online again.
  • Increased oil demand Oil for energy demand in the EU is likely only temporary.
  • Global recession risk is rising.
  • The Iran deal is likely to close.

For some time now, I have believed the oil market to be broken, where data is ignored and outdated core beliefs of the market rule. I first took action on this belief on March 15, 2022, when I initiated a short position in WTI crude (CL1:COM) using WisdomTree WTI Oil 3x Short Daily ETP in USD ($3OIS) through a margin product. I have since sized up my position on 13 separate occasions. I don’t usually disclose my position in such detail, but I believe such a controversial issue must be read with disclosures in mind.

Before diving in, I need to clarify that this article will focus on WTI crude prices, and any reference to oil price uses the price of crude.

For ease of reading, this article will be broken into seven separate points:

  1. Oil is trading at a premium based on historical data points
  2. U.S. supply is beginning to come online again
  3. Global recession risk is rising
  4. Increased oil demand for energy in the EU is likely only temporary
  5. The Iran deal is likely to close
  6. Russian oil is still flowing
  7. Conclusion and risks to thesis
Click here to read the rest on Seeking Alpha

Excel Source Documents

  1. 01-04-1985_to_08-05-2022_Weekly_Analysis_of_U.S._Crude_Oil_Stockpile_Days_Versus_Futures_Price.xlsx
  2. 1972_-_2021_Oil_Production_v_consumption_v_population_v_median_annual_price.xlsx
  3. 1983_to_08-08-2022_Weekly_U.S._Field_Production_of_Crude_Oil.xlsx

Disclosure: I/we have a beneficial short position in the shares of CL1:COM either through stock ownership, options, or other derivatives.

Additional disclosure: While I express my opinion in this article, only you can determine if a specific strategy is right for your portfolio. You should always do your own research before buying, selling, or shorting any stock. Any charts, graphs, or tables not specifically credited to another individual, company, or institution were created by the author using his own research.

While I am not directly shorting crude oil, I have invested in a 3x reverse daily ETF using a margin like product that enables me to profit when crude oil decreases in price. This is an incredibly risky method of investing even experienced investors should think hard before initiating.

Quick Oil Update From the Airport

04 Thursday Feb 2016

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I had to post this update from my phone due to being in the airport so please pardon the grammar.  Oil prices climbed over 8% today due to the inverse relationship with the United States dollar.  The US dollar slid towards the end of the trading day.  Keep in mind that oil inventories climbed by 7.79 million last week to the highest US inventory glut since 1930.

For more information click here.

Saving But Still Losing

19 Wednesday Aug 2015

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On August 9, 2015 an article was published on marketwatch.com titled: “Millennials are saving — but they’re doing it wrong” the article discussed how the generation that grew up during the crash of September 2008, also known as the Great Recession, are saving at a rate higher than any other generation.

According to a study by bankrate.com and cited by MarketWatch, 26% of Americans under 30 are invested in stocks.  The 74% of Americans who are not investing their money and earning a maximum of 1% on their savings accounts are actually losing money when you factor in an average inflation rate of 1.6% in 2014.  Meanwhile if invested in the Vanguard 500 Index Fund, which owns the 500 largest companies listed on the US stock exchange, than you would have made a return of 14% in 2014.  After fees of 0.17% and inflation of 1.6% you would have earned a profit of 12.33% on your investment instead of losing 0.6% due to inflation on a savings account.  An example is:

temp

  • Asset Allocation

An important point to remember when deciding how to save for retirement or even just save in general is there is no such thing as all or nothing in investing.  The term for this is asset allocation and in layman’s terms means how you organize your portfolio.  An example is:

tempAs you can see from the allocation above investing is not an all or nothing strategy.  Index Funds follow certain parameters for their allocation which can be anything from a sector of the market to the S&P 500.  Stocks are individual companies and therefore, less diversified.  Bonds are debt and I recommend not owning any bonds with a credit rating less than A- bonds can also be insured which helps limit your total amount of risk.  Another important point to consider is why is this money being saved.  Your retirement account should have less risk than the rest of your investments and your allocation should reflect that.  Remember there is no one size fits all investment strategy and you as an adult need to take the time to create your own personal asset allocation strategy.

  • No Time?

What about people who do not have time to research each individual stock?  My recommendation is an Index Fund.  Index Funds have a great resource, morningstar.com an example of which can be found here.  With investing it is important to remember to have a long term outlook.  When I invest I look forward ten years into the future and ask myself will I be glad I owned this and why.  Vanguard and Fidelity have great low cost Index Funds.  When purchasing an Index Fund, unlike a stock, you are purchasing a basket of stocks with a general theme.  That theme can be anything from mirroring the S&P 500 to clean water.  My personal recommendation is to start out with Vanguard 500 Index, found in the example above, and expand from there.

  • Being Uninformed is no Excuse

When I was 12 years old I taught myself to read a quarterly and annual SEC filing.  I did it through reading the reports and looking up terms and phrases on sites like Investopedia.com and sometimes Wikipedia.com.  I took a half an hour out of my day to read articles on the BBC, CNBC, and Bloomberg.  Reading daily news helps you understand the connections of our daily world.  My blog provides a daily news breakdown Monday through Friday.

-Websites

  1. Investopedia
  2. CNBC
  3. Bloomberg
  4. Wikipedia
  5. Yahoo Finance

-Blogs

  1. A great blog on personal finance for the rudimentary investor to the expert is How To $tuff Your Pig at howtostuffyourpig.com.  You won’t regret paying them a visit.
  2. The Financier Daily at financierdaily.com check back with us for daily news breakdowns as well as market commentary and analysis.

IMF Welcomes China’s Devaluation of the Yuan

15 Saturday Aug 2015

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The International Monetary Fund has welcomed China’s devaluation of the Yuan due to their economic need for more exports.  On August 11, 2015 the People’s Bank of China announced the move from a tightly controlled currency to one more controlled by market forces.  The IMF has reiterated the need for China to move towards a more market based currency before China’s recent devaluation in a report published on July 7, 2015 they stated that a free-floating currency is

necessary for allowing the market to play a more decisive role in the economy, rebalancing toward consumption, and maintaining an independent monetary policy as the capital account opens

China recent move towards a more market based currency is clearly an attempt by the country’s government to boost exports after July’s export numbers tumbled 8.3%.  When looking at numbers coming out of China, like July’s export statistics, it is important to remember that they are impossible to verify and are commonly believed the be at least a little manipulated.  After the massive monetary policy shift from the People’s Bank of China one should assume that China’s economy is likely in worse shape than they are currently letting on.

Recently China’s economy became the biggest in the world and with these troubling numbers coming out of China investors should watch them like a hawk.

For more information on the IMF click here

China Weakens Yuan Again

12 Wednesday Aug 2015

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The People’s Bank of China on Wednesday set the price of the yuan 1.60% lower than Tuesday’s price for 6.3306 per United States dollar.  The continued move lower versus the dollar by the People’s Bank of China shows just how committed China is to continuing to battle the United States for economic supremacy.  It is also important to remember that China is a communist country and because of their political system they have a smaller number of people who the leader, Xi Jinping, needs to keep happy and he can only continue to do that if the money continues to flow.  Therefore, this could also be seen as a move to stabilize the economy to continue the communist’s hold on power.

Not When But How

11 Tuesday Aug 2015

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I was recently reading two articles on the United States and our mounting debt problem.  The topic has seen an increasing amount of press as our debt crisis finally comes into the spotlight.  The first article I read was on CNBC and was titled: “Listen up, candidates: Social Security is broken.”  It was not until I read the second article on How to $tuff Your Pig called: “An Idiots Question” that I really started to think about the crisis the United States faces.  How to $tuff Your Pig spoke about private debt, but I want to talk about public; an issue I find substantially more alarming.

  • The issue:

The United States is 58% underfunded on all future endeavors.  That means that 58% of the money the United States has pledged nobody knows where it is going to come from.  Since the end of World War Two the United States has been the world economic superpower and yet since the 1950s our national debt has continued to rise at an alarming rate.

  • The Reality:

If this issue is not fixed in the next twenty years at most; the United States will not be a world economic power.  The United States cannot keep pushing off our expenses to the next generation because eventually the gravy train has to come to a stop.  As How to $tuff Your Pig pointed out this could not have come up at a worse time as not only is the government of the United States broke so are its people with no reasonable solution insight.  The fact is when planning for retirement do not count on Social Security to be there as it alone is 32% underfunded or approximately $25.80 trillion in the red.

  • Conclusion:

The question is not when will we pay it back but how because I have not heard a viable solution yet.

The Price of Oil and Q2 Reports

10 Monday Aug 2015

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There are a number of earnings reports coming out this week and with oil ending today below $45 I decided to discuss the potential impact of the price of oil on some of the companies releasing their Q2 2015 reports.

Recently the price of oil has crashed with a 52-week high of $93.34 to a 52-week low of $43.35; oil has dropped 22.70% in 2015 alone.  This has caused some obvious losers like oil and natural gas exploration companies but what about the not so obvious winners?  In Q1 2015 the average price of WTI crude was $48.54 this helped companies like Air Canada post record breaking profits.

Statista

One of the driving forces behind their outstanding quarter was the drop in the price of oil.  In Q1 2014 the cost of aircraft fuel was approximately 25% of total operating expenses of CAD$3.127 billion.  In Q1 2015 the cost of aircraft fuel was approximately 19% of total operating expenses of CAD$3.049 billion.

Q1 2015 is in gray Q1 2014 is in white (dollar amounts in Canadian Dollars)
According to the chart above the only operating expense that dropped significantly was Aircraft fuel decreasing by CAD$201 million a significant contributor to their CAD$78 million total operating expense improvement.
In Q2 2015 the average price of oil increased to $57.84 or an almost $10 increase.  This is important to keep in mind that while oil has been significantly down this year one should not expect the same savings on the price of fuel in Q2 2015 that we saw in Q1 2015.
I still believe that the price of oil has a long way to go before we see the bottom, with Iran potentially coming into the marketplace nobody knows in six months what the surplus of oil and gasoline is going to be.  For now lets all look forward to saving at the pump and seeing companies with high fuel costs post significant decrease in operating costs.
  • Industries with high fuel costs
    • Airlines
    • Waste Management
    • Transportation
    • Etc.