Strike a Gusher Shorting Oil

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Company U.S. Oil Fund (NYSE: USO  )
Submitted By: JakilaTheHun
Member Rating: 99.94
Submitted On: 4/8/2011
Stock Price At Short Recommendation: $45.12

U.S. Oil Fund Profile

Star Rating **
Market Cap $1.9 billion
2x Bets ProShares Ultra Oil & Gas (NYSE: DIG  )
ProShares Ultrashort Oil & Gas  (NYSE: DUG  )
ProShares Ultra DJ-UBS Crude Oil  (NYSE: UCO  )
ProShares UltraShort DJ-UBS Crude Oil (NYSE: SCO  )
3x Bets Direxion Daily Energy Bull 3X (NYSE: ERX  )
Direxion Daily Energy Bear3X (NYSE: ERY  )

Sources: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
I've expressed my views on oil before, but my general thesis is that at over $120/barrel at Brent, it's unsustainably high. It's in the $120-$125 range on Brent right now, so I don't think it's necessarily in danger of imminent collapse, but I do believe that long-term gains at this price are extremely limited. Moreover, in the event of a market pullback / crash / double-dip recession, we'll probably see oil fall faster than the broader S&P.

There are several reasons why I don't believe oil can hold up at these levels:

(1) Trucking becomes much less economical vs. rail, meaning that more business shifts to rail, and oil demand is weakened
(2) High oil prices are a drag on the US (and Chinese) economy, which creates a greater possibility for rapid demand destruction
(3) People start to flock to hybrid sedans / coupes with higher oil prices, which weakens overall demand for oil over the long-run
(4) The more expensive oil gets, the more attractive natural gas looks in comparison, causing further potential for oil weakness,
(5) In general, high oil prices stimulate demand for natural gas, nuclear power, and alternative energy, causing further long-term demand destruction for oil,
(6) Likewise, high oil stimulates technological innovation in areas that reduce oil consumption,
(7) Pressure will begin to mount on policymakers to expand mass transit with higher oil
(8) We'll see more oil supply coming from high-cost sources such as the Canadian oil sands

Overall, there are a whole host of factors working to (a) decrease demand for oil and (b) increase supply once prices get this high. Any movement upwards exacerbates these factors exponentially once you tip over the $120-$130/barrel range.

Overall, I see shorting oil as a good hedge right now and I believe it will underperform the S&P at these levels.

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The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 13, 2011, at 6:28 PM, johnkun72 wrote:

    This guy has no idea what he's talking about! One more thing goes wrong and oil is taking off to $200

  • Report this Comment On April 13, 2011, at 7:53 PM, Techlog wrote:

    I don't agree to all the agrumentation. Natural gas was cheap and there was no massive conversion. It take time to change behavior, to convert your fleet to natural gas. Oil market is a lot volatile and it can instantly go up. See analysis comments below from Goldman today:

    Buy Crude, Could Hit $160: Bank of America

    On Wednesday April 13, 2011, 9:41 am EDT

    Following Goldman Sachs' negative call on crude prices which took the wind out of the commodities rally this week, Bank of America Merrill Lynch is predicting a 30 percent chance that Brent crude could hit 160 dollars a barrel in 2011.

    "Commodity prices should move broadly higher in 2011 on robust economic growth in emerging markets, despite relatively weaker growth in developed markets," said Sabine Schels, a commodity strategist at BoA Merrill Lynch in London in a research note.

    "With oil demand expanding rapidly and Libya production down by at least 1 million barrels per day, we forecast (the) Brent crude oil price to average 122 dollars a barrel in the second quarter, and believe prices could briefly break through 140 dollars in the next 3 months," she said.

    Given the risks from the situation in the Middle-East and North Africa, Schels says there is a chance the price could go even higher over the next 2 months.

    "Under our upside risk scenario, Brent prices could average this year between 125 dollars a barrel and 160 dollars a barrel," Schels said.”

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