On the assumption that oil demand will catch up with supply (or new equilibrium level) at some point and thus oil will return to somewhere in the realm of $100/bbl, would going long in UWTI (3*leveraged crude futures ETF) not seem like a very strong investment strategy?
Oh man, I was just one click away from shorting oil on that irrational Friday peak…but I don’t like to put money on this sort of speculative stuff.
While I’m not an energy expert, it seems this is far from being over. Lower seems almost certain, in that it has to happen to kick the losers (shale) out of business. Also don’t see why $45 is low, and that it needs to return to $100. The inflation adjusted avg price is $42 since 1950. I like to go long/short when things are bounded on one side, like if we hit $20 I’ll be in long with $100K. But at a middle area like $45 which could go either way? Naw. Also…those 3X funds can move 20-25% in a day, like they did on Friday. When the speculators go all-in short that’s going to hurt really bad…
I definitely agree on the speculative piece - I was really looking at it from more of a long term play (i.e. money I can lock up for 3-4 years).
I didn’t realize the inflation adjusted price of oil was that low, also you would have to think that once oil hit mid-low 30’s that some of these drillers are having extraction costs near what the’yre able to sell them for and thus massive reduction in supply? I don’t know much about the industry (comparatively a lot less than you it sounds like).
You shouldn’t do this. Those funds are trading vehicles only and are not investments. They reset daily which screws up their long-term performance, particularly during periods of volatility. Look at UCO (double long oil ETF) over the last five years.
Even when you strip out the effects of those leveraged ETF’s, the shape of the futures curve is unfavorable for buying the spot contract and rolling it over. The futures market has already priced in a 20% higher price one year from now – the March 2016 contract is 58 bucks, compared to 48 on the March 2015 contract so you’ve got a material negative roll yield. People calling for higher WTI one year from now need the price to be over 58 to be right, not 48.
I don’t fully understand how the futures curve affects return in the long run - if the price of oil is $100 in three years will the ETF not reflect (over the period) a 100% appreciation in the futures price of oil from today? (assuming at this point oil futures are tracking immaterially different from the spot price at that time)
^ Specifically, that ETF/ETN is long the March 2015 contract. Currently the crude market futures prices are higher than the spot contract (March 2015). When the March 2015 contract expires, the ETF sells the contracts and uses the proceeds to buy a more expensive April 2015 contract (March '15 is $47.85 and April '15 is $48.59), producing a negative roll yield. The market has already priced in higher prices in the future.
That’s just one of the problems with these ETF’s. If you want to buy the leveraged ones, you’re asking for even more trouble. Asbolutely do not buy the leveraged ones as long-term investments. If WTI is $58/bbl next year at this time, I’d bet big money you will lose money holding that thing.