Oil Is Always Volatile Short-Term, But Is Going Up Medium Term


Summary

You must differentiate oil from oil stocks.

Oil is extremely volatile in the short-term and even more difficult to trade.

Many oil stocks are seeing increasing cash flow, leading to higher shareholder yield, as they realize higher oil sale prices.

Oil stocks are a still a screaming buy in my opinion and I think one easy play ETF will double in share price within 2 to 3 years.

There is a huge difference between oil and oil stocks. The price of oil moves on changing narratives in the short-term. The United States Oil ETF (USO) and 3x United States Oil ETF (USOU) are going to move a lot. You can try to swing trade those ETFs and affiliated options, and probably fail, or, you can scale in and out over longer time periods – that’s what I do.

The Goldilocks Price Range of Oil

I have covered the price range for oil prices multiple times – WTI, because that’s what USO and USOU track. The range looks like lower $60s to around $80 per barrel, if there is no further disruptions to supply.

Oil Price’s Goldilocks Moment

A disruption to to supply come autumn (or any other time), could launch oil prices towards $100 per barrel. Keep an eye on Iran.

There is no catalyst, other than a sudden recession, to send oil prices below $60 per barrel for anything other than a schizophrenic market moment.

When the price of oil was in the low $60s, in contango and looking like it was ready to breakout, I bought some USOU and some USO calls, as well as, Invesco DB Oil ETF (DBO) Calls. 

On June 26th and 27th, oil had a short-term top. As I mentioned, I scaled out of 1/3 of my oil positions then. I have done nothing since. I won’t buy or sell until the price of WTI oil is in the low $60s or high $70s again.

When the price of oil is around $70 per barrel, I DO NOTHING. Nothing is a great strategy most of the time. Pick your spots for maximum potential and risk management. As I’ve said over and over, avoid trading the middle of the market, you have no idea what direction the market will go next when it is in the middle of a trading range. Any headline can move things in either direction.

No algorithm, technical chart or guess will ever be worth your money in the middle of a trading range.

What we have to watch now is whether the futures curve stays in backwardation. If it does, then we want to keep finding ways to be long USO and USOU. If we see contango emerge again, then it’s time to end these positions.

HFI put out an article today discussing a timing mismatch on oil delivery. This is something I mentioned a couple weeks ago as a possibility. Basically, Iran is still delivering oil and Saudi Arabia already increased production. So, for at least the driving season, oil prices shouldn’t surge. 

But, let’s consider this, the loss of 500k barrels from Iran is becoming a foregone conclusion come November. The range is shifting upward though as it is clear that only China might be willing to buck the sanctions. That range has moved from the 300k-1mbd I identified months ago, to 1mbd-2mbd. 

Let’s presume that a million barrels are taken off of international markets. That means Saudi Arabia and Russia have to fill much of that void since the Permian is about to see new supply increases temporarily stop (and we know that’s about the only place new supply increases are coming from). That leaves a lot of room for oil prices to drift upward going into next summer.

Permian pipeline capacity will only increase a little by next summer. Oil prices are going to remain firm since Saudi Arabia and Russia don’t want to use all of their spare capacity which is what it would take for supply to exceed demand that is increasing by nearly 2mbd by next year. 

Oil Stocks Still Poised To Surge

Oil stocks are taking it on the chin the past couple days on the short-term oil price volatility. Does that really make any sense given what we know about their future earnings?

Remember what we learned in the first quarter. With realized oil prices around $50 per barrel, company after company saw free cash flow and earnings rise. The narrators of the the whole backwards looking “frackers have never been cash flow positive” narrative deserve a collective Gibbs head slap.

Oil prices that companies are starting to realize as old hedges roll off and new hedges are put on, as well as, some companies taking spot prices, are poised to drive earnings substantially higher for many frackers. 

The easiest way to invest in the American oil exploration and production companies is with the SPDR Oil & Gas E&P ETF (XOP). This is the fund I have been touting for over a year now. Jeffrey Gundlach made it one of his best ideas at the Sohn Investment Conference.

Buy the dips on XOP. 

Disclosure: I am/we are long XOP, USOU.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own a Registered Investment Advisor – bluemoundassetmanagement.com – however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.