It looks that if oil bounds back to its highs, I will be sitting on about a 30% unrealized loss on my hedge, being short ERX. That amounts to roughly a 3% unrealized net loss when comparing it to the big picture. If crude oil should go “2008,” then my losses will be worse.
And I am perfectly willing to accept that.
Simply, even in the face of dollar destruction, the risk of a collapse of oil prices is far more real than the likes of Goldman Sachs would suggest. Take a closer look at the economies of countries around the world, and what I am personally seeing is the risk of an industrial slowdown.
Also, we have several countries, mostly BRIC types, who are heavily subsidizing their use of oil or, in some cases, like Russia, refusing point blank to export it. This is creating an artificial collapse of inventory in the Western world, a.k.a. where prices are set. However, like a taut rubber band, should these economies be stretched to the point of no longer being able to afford the massive expenditures needed to keep gasoline flowing cheaply, or be pressured to release their iron grip on global trade, and you will witness the price per barrel of crude unwind at an alarming rate.
There are plenty of other potential events that could similarly affect the commodity markets, with respect to crude; like the Middle East fire being put out or a Europe double dipping back into recession. Even massive easing and continued inflationary pressure, when coupled with a collapsing demand on the part of industry for crude products, can lead to lower oil prices.
While I would not be caught dead betting against most commodities, at this stage in the game, maintaining a low net hedge, but one that is highly volatile, against crude oil is a comfortable security to have, in my opinion.
If we should breeze past this point, then my gains will dwarf my hardships, and I can always tax-loss sell for the end of the year. Or, if oil should look like it’s going to continue appreciating, I can double down and wait for its crippling effects to grind an axe against consumerism’s face.
But I cannot be suckered into betting on the continued depreciation of the US Dollar before it has been assured. Not while already being mostly long.
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Energy has been beaten down lately.
As of last week, less than 20% of all energy stocks were above their 50day moving average (contrarian indicator)
Oil should lead the next leg up? but what do I know
From a technical stand point. But as I said, if any number of these developments mentioned above occur, that chart is going to light itself on fire and stab people following it in the gut.
Interestingly, if oil goes up too high, those who bet against oil will likely experience redemption anyway. It affects prices and therefore demand system wide. Oil speculators have a $20-30 dollar window.