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http://www.dailyreckoning.co.uk/article/121020062.html
Time to make some money in oil futures and help save the environment. The nice thing about owning a commodity is that you don't have to decide which company will win. There is only one oil.
Oil futures are not just betting on the future use of oil, but making a bet that the market is underpricing it. Slight shifts in perceived supply and demand can cause severe volatility in futures. Timing is also crucial. What Kunstler said was equally true six months ago, but if you had bought options that expired last month, you would have lost a lot of your money.
None of this is to say oil futures are not good investments. However, they are not "safe" and an unsophisticated investor should be careful in considering them. Nate Hagens recently wrote a TOD article on oil futures, which would be a good starting point for learning more about them.
The nice feature of long term futures is that it just takes one spike in price to cash out. I think $15,000 buffer per contract should get you through most troughs. Do you think oil is going below $45?
However, I don't think there is an awful lot of easy money in publicly traded asset classes. Futures contracts are essentially making a bet with someone else on where the oil price will be at a given time. As we've seen on polls, it is much harder than it looks.
I think for people who don't mind exposure to a volitile asset and want to be able to profit directly from high oil prices in the future, it could be an excellent wager. However, I think someone would be unwise to put a large portion of their assets in oil futures.
I don't understand how you cash out on an oil future if the spike occurs before the end of the contract.
IIRC, you can cash out any future before the end of the contract, in fact most people do. Unless you want to take physical delivery of thousands of barrels of crude...
JN2 (back from 2 weeks vacation).
As I noted in another comment to realist, if you have information that a future event will reduce the value of the futures contract, you need to be aware that the field of potential buyers is likely to have this same information of this as well.
So while you can get rid of the contract, you may not be able to "cash out" before the valuation impact.
The far out futures are thinly traded and generally a very good deal because most professionals are tradjng the front months and trying to make a quick buck. Like Warren Buffet, if you are willing to take a short term loss you can play the long term due to the fundamentals of peak oil. Most "professionals" don't get peak oil. Just look at the 2011 price for the proof. You are assuming that everyone acts rationally with the same information. The problem is that the markets have never seen peak oil so traders fall back on old habits that govern corn futures.
Now is the time to get in before the institutional investors figure that out.
I'm not advocating moving your entire portfolio into oil. But it seems prudent as a hedge against energy inflation rather than trying to guess which oil company will "win".
I have agreed with you that I think peak oil is not priced in by those who manage money professionally. Whether or not you are smarter than the profresssionals is a different story and one that is based on opinion. Warren Buffet is probably not invested in oil futures and only invests in areas where he feels he has a level of competive knowledge above and beyond that of other investors. I don't think he would agree that any of us meet that criteria.
I do think that oil futures can be a prudent hedge against energy inflation. I'm just saying that there is no easy money. Oil future are volitile, volitility is the definition of risk in finance, so oil futures are risky. I do think it may be a good risk for certain people and for certain portions of their portfolios. I also noted above that as part of a larger portfolio oil futures can actually reduce the overall risk if their volitility is not correlated.
Anyone who bought during the peak at $75 lost money so it requires some savvy to figure out when the oil companies are going to lower the price for political reasons or to kill altnative energy solutions.
I find it interesting that one of the oil execs at Davos threatened to put Vinod Kholsa out of business buy lowering oil prices for two years. To me these are the biggest risks.
A shrewd investor should be able to figure out when these manipulations are occurring and protect themselves. A typical examples was the mid term election. I stayed out of the market becuase I knew the oil companies were under big pressure by the republican incumbents to lower prices and my prediction turned out to be a good one. You can't always be right but if there is any doubt it pays to sit out for a while.
Once someone starts selling cellulosic ethanol, I will sell my futures and see how the oil companies react, but in the meantime I think we are going to have a slow inflation of oil now that the election is imminent.
Protection up to $45 via margin buffer should get you through most disasters. I sold the day after Katrina hit and made a nice profit.
This is a very slow event and the alert investor should have time to react.
Oil rationing and new taxes would be announced weeks in advance and allow investors time to sell. 80% of world oil is already nationalized.
Doomsday is at least 10 years off. Why not pay off the mortgage in the meantime?
I do want to bring your attention to one key point. Yes, you may have time to sell in advance of a calamitious event that would reduce the value of the futures contract. But keep in mind that if you know that the future event will impact the value of your futures contract, you have to assume the buyer (market) will as well.
If you hold a 2010 futures contract and news comes out that will cut the value future in half at the contract end, the market value will fall immediately. In fact professional traders are likely to be able to anticipate the news and trade faster than you can.
The same would apply for a stock. If you hold the stock of a company and find out that their main revenue source will be cut off in five year. You would sell immediately. But so would everyone else. The stock would rerate at a lower valuation consistent with the new expectation.
http://en.wikipedia.org/wiki/Rational_expectations
Again, I do think that oil futures can be an excellent investment. I do think that oil prices will go up and I expect that a futures contract enetered into today will be profitable at expiration or for sale to another investor at an earlier point. However, someone considering investing in oil futures should be aware this is a volitile asset class that can move up or down drastically (which is the definition of risk in finance).
Another thing to consider is that oil futures may well have less correlation with you existing assets than a typical investment. in this regard, holding a portion of your assets in oil futures could reduce the overall risk of the portfolio.
http://en.wikipedia.org/wiki/Modern_portfolio_theory
Remember that futures accounts are regulated and protected by the SEC. Do not open a hedge fund that is not protected. I had my account with Refco when their hedge fund collapsed but because my money was in a futures account it was protected and I did not loose a dime.
Check out the SEC website for more information before investing anything. http://www.sec.gov/answers/cftc.htm
--Jim Kunstler
It is, for instance, perfectly possible that many people with multiple cars have switched to using the smaller, older, "less sexy" car, leaving the new "large iron" in the garage.
And speaking from my own experience I can certainly say that many have switched to taking the local train to work and did not go back to their old habits of driving. The result is that it has become much harder to find a seat on the train...
In case of heating oil the difference between wearing a t-shirt and a sweater will have a 5-10% impact on heating bills. Something as simple as closing the door to an unused room will do the trick and save a few percent energy.
Any one of these rather trivial changes can explain short term demand destruction on the percent level.
The longer term demand of transportation fuel will, of course, be dominated by falling sales of large SUVs and trucks vs. rising sales of compact cars and hybrids. These changes are cumulative and far from trivial for either the automobile or the oil industry. Hybrid sales are growing at 50-100% year over year and are only limited by manufacturing constraints, not demand for these vehicles. And one can only speculate how many people do not choose a hybrid or even a compact but are buying a car one size down from what they would have bought if there had been no fuel price pressure.
;-)