Get a Little Crude for Christmas?

A. Colin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The wonderful thing about commodities and their future contracts is that their price reflects everything known about their supply and demand at the time. The pattern tells the story. The wonderful thing about commodities for Foolish mice in the stock market is those patterns lead to confident, informed trends backed by underlying, long-term cycles.   

<img src="/media/images/user_15176/us-oil-etf-dec-2012_large.PNG" />

The United States Oil Fund® LP (NYSEMKT: USO) for example, is a domestic exchange-traded fund (ETF) designed to track the benchmark Crude Oil price - light, sweet West Texas Intermediate. Buyers of USO are BULLISH on the price direction of Crude. The ETF holds $1.16 billion in 13,000 February 2013 NYM Crude Oil futures and $1.2B in cash. It is one of the most actively traded energy ETFs, with over seven million shares traded daily.

The trend line for the 100-day Exponential Moving Average (EMA) on the daily USO chart is BEARISH, but the 10-day EMA is turning up. While the 10-day EMA crossed BELOW the 100-day, also a BEARISH sign, the USO ETF price-action has traded UP the past week to meet, but NOT cross, the 100-day EMA. This move indicates a possible reversal in the short-term trend is coming, though the actual BUY signal is not here. The 10-day has not crossed the 100-day EMA yet.

A bond broker for JB Hanuaer, now Credit Suisse, I was an Asst. Energy Trader for Energy Futures (Merrill Lynch, now Bank of America) and Office Manager for Infinity Trading (Jupiter, Florida) in the ‘90s. I shorted Crude Oil down to $10 a barrel and Natural Gas every time it traded over $2. After almost two years of watching the markets, I made over 1,300% annual ROI on my own option trades.

<img src="/media/images/user_15176/crude-weekly-dec-2012_large.GIF" />

 

Foolish mice who want to nibble on the capitalist Crude cheese of course, must check out other energy cheeses. At Christmas time, almost the middle of winter, the demand side is pretty obvious for Heating Oil. The Heat is probably at a peak, relative to Crude. In fact, while the daily futures chart is BULLISH, the weekly trend is DOWN. The monthly Heat chart though still indicates a long-term BULL market.

Generally rising in price, relative to Crude, going into spring, the Unleaded Gasoline contract (Nolead) is cheaper than Heat right now and the daily chart is also BULLISH. The weekly chart is still BEARISH; strong price action on the daily has yet to turn the Nolead market around. Monthly Nolead is in a long-term BULL market.

Competitor to the Heat for power generation, the dramatic 2008 crash and three year slump in Natural Gas futures is finally over. 2012 has been a significant rise in monthly Natural prices, despite enormous supply coming onto the market, indicating a BULLISH trend. Another run at $3.50 Natural on the weekly chart seems more likely than a test of $3.00 support. December’s crash in daily prices may not be over yet; no strongly BULLISH move is indicated yet.

The other wonderful thing about commodities is that “what goes up, must come down!” High prices pull high supply into the market like a money magnet. In fact, a recent Bloomberg Business week article, “Everything you know about Peak Oil is Wrong,” (http://www.businessweek.com/magazine/everything-you-know-about-peak-oil-is-wrong-01262012.html) makes a very strong case for enormous new energy and commodity supplies coming to market…eventually.

Though current short and mid-term energy future prices are MIXED, the long-term trends for Heating Oil, Unleaded Gasoline and Natural Gas are BULLISH; all positive indicators for FIRMER prices in Crude Oil and the USO ETF.

For protection on the BEAR side, or to ride the DOWN trend until a buy signal does appear, BUYING a ProShares UltraShort DJ-AIG Crude Oil ETF (NYSEMKT: SCO) is a short on the underlying Crude Oil market. SCO trades relatively actively for a leveraged energy ETF, with over one million shares, but leverage is two times the Crude market.

Other energy ETFs are nowhere near as actively traded as the popular USO. Foolish mice would be wise to chew on the USO ETF as it follows Crude, or only nibble on the other ETFs in small bites. 


The author has no current postions in any of the markets mentioned.

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