This really isn’t a question of ‘if’ you need to invest in crude oil. It is actually a question of ‘when’ you should do it. Let’s look at the long-term fundamentals, first of all.
1. The world population keeps growing. In the places in the world where the population grows more and faster (Asia, Africa and Latin America), the rising purchasing power of people means more cars, so more oil consumption. So there’s no doubt about it: oil will keep having strong demand, long-term.
2. Alternative energies are excellent, but we are very far from having anything that replaces oil. So, while it is wise to anticipate that eventually some other form of energy will replace oil, that is unlikely to happen anytime soon. So that’s another reason to support long-term strong oil demand.
3. Peak oil is here to stay. All the easier oil wells to explore have been depleted, which means that essentially almost all of the oil resources that can be explored require more investment, more effort and more advanced technology. Shale oil is the perfect example of that. This means that the world will keep finding less oil which will keep costing more to explore. So that’s another reason to be bullish on oil, long-term.
4. The Middle East, from where very large portions of oil come to feed the world’s oil supply (Saudi Arabia, Iraq, Iran and Libya are the best examples), only seems to get tenser and more prone to regional conflicts. And make no mistake: if there is a serious conflict in the Middle East, oil will go through the roof.
Now, as true as all this may be, this is about the case for investing in oil, but from a long-term point of view. You can definitely take advantage of oil at $38 as a bargain for a long-term investment, if that is the positioning that you’re taking. And that would be wise. When oil goes eventually back to $100, $150 or even beyond that, getting oil at $38 today will, in retrospective, seem like it has been the perfect buy.
However, in the short-term, things are quite different. The currencies of oil producing and exporting countries are taking a heavy beating. Saudi Arabia is burning reserves at a faster speed than China. China’s oil demand is currently low and will likely go lower. In Venezuela or Angola, which are highly dependent on their oil revenues, the situation is close to being unbearable. The oil inventory everywhere in the world is growing, and finding places where to store it is becoming a difficult and expensive operation. There are oil tankers going back and forth in the oceans, because there isn’t the capacity to store the oil they’re carrying.
China’s economy is slowing down ostensibly. Its banking system is the most leveraged in the world, threatening a worldwide impact if it suffers a hit, and that is only likely to put even more pressure on oil. Europe’s economy is a mess. Japan’s economy is turning into a simple money printing operation that is likely to face its day of reckoning soon. And the US economy, while showing some signs of resilience, is likely to be affected by the strong USD, from any shocks the strong USD causes elsewhere, and from the slow-motion train wreck that Europe is and the probable devaluation of China’s CNY.
So, in the short-term, Ridge Capital Markets believes that you are more likely to make money from shorting oil – possibly by shorting the USO ETF (NYSE:USO) – or from shorting oil and commodity currencies, such as the MXN and the CAD, than by investing on oil.
You can also go long the USD, which is an indirect way of shorting oil, since the USD tends to be strong when oil is weak. Remember that if the USD resumes its bullish trend to see the Dollar Index reaching 120, oil can fall to $20 or even $16,50. And, if and when that happens, the money that you make by shorting oil all the way down to those values will be well invested in oil, to see it rise again from that level – because it will not stay there for long.