First and foremost I admit this title is a bit hyperbolic but I wrote this after seeing one too many titles "Oil Below $40". Even if there were a major economic global slowdown, oil will NOT stay below $40 for any appreciable amount of time (by this I mean weeks). On the flip side, oil will not go above $80 and stay there for any amount of appreciable time (again I mean weeks). The only exceptions for the next several years for this rule would be if the cost of extracting a barrel of oil fell appreciably or there was a massive Global Political Event (revolution in Russia). Even if there is a massive Global Economic slowdown, the price of oil will not most likely not break $40 and if it does it will not stay below $40 for more than a couple of weeks.
One last point before explaining; while I'm sure there are a lot of nifty graphs and fantastic charts to show why oil will fall below $40 they are all useless and probably outdated. Any "theory"/"chart" that shows data from more than 3 or 4 years ago is as useful as a snot flavored lolli-pop.
Go Long: When oil falls below 45 take a long position on contracts with 2-3 month expiration dates (for instance if oil fell below $45 tomorrow would be long on CLZ2019 and CLF2020) and keep adding to your positions if price falls. If oil were to call below $40 I would then enter much more near term contracts as the price will rebound above $40 in the very near term (if fell below $40 tomorrow I would go long CLV2019 and CLU2019).
The best Long signal one could ask for is oil approaching or even breaking $40
Why?: As oil approaches $40 all (or almost all) NSA will just not be able to accept the negative returns associated with the cost of producing another barrel. While State actors will have to continue to produce they will reduce the amount that is released until prices increase. Since NSA are accounting for an ever increasing percentage of oil produced, it is the actions of NSA that matter. In short, the NSA has a profit and loss incentive and will not continue to pump oil if their losses continue to increase (until such time the cost of a barrel of oil decreases but that is not going to happen in the near future). This is not to say they will 100% stop, but they will drastically decrease production and that is the key.
Go Short: As oil approaches $80 one should go short on medium term contracts. (If oil were to hit $75 tomorrow I would be short CLZ2019 and CLF2020. While I wouldn't be short nearer term contracts if the price broke $80 -for several reasons happy to explain separately- as I would when the price falls below $40, I would increase my short position on CLF2020 and CLG2020)
Why?: As oil approaches $80 every producer can make money on each barrel and will increase production accordingly. Once again, the NSA is key. The NSA will open closed wells, increase production and take advantage of the higher prices. Even if State Actors maintained current levels of output, NSA have absolutely no self-interest in doing so because a barrel not produced is a dollar of profit not realized. In other words, the NSA will "Get while the getting is good". This will drive up production, production will outstrip demand and the price will fall. For many reasons (again will explain separately if one would like) there is no way to control the actions of the NSA. In the long run, the NSA is the NSA's worst enemy when it comes to price.
In fact, $80/Barrel would be a great indicator to go short CL (again, unless there is a generational type of event that drastically constricts the flow of oil)
Until the cost of extracting oil gets much cheaper, the price of oil will yo-yo between $40-$80.
I currently do not have any open positions in CL and I want to make clear that this is NOT my theory (although I believe in it as if it were mine). Anyone who tells you that oil is going to go below $40 and stick is either short, ignorant or just plain stupid.
One last point before explaining; while I'm sure there are a lot of nifty graphs and fantastic charts to show why oil will fall below $40 they are all useless and probably outdated. Any "theory"/"chart" that shows data from more than 3 or 4 years ago is as useful as a snot flavored lolli-pop.
Go Long: When oil falls below 45 take a long position on contracts with 2-3 month expiration dates (for instance if oil fell below $45 tomorrow would be long on CLZ2019 and CLF2020) and keep adding to your positions if price falls. If oil were to call below $40 I would then enter much more near term contracts as the price will rebound above $40 in the very near term (if fell below $40 tomorrow I would go long CLV2019 and CLU2019).
The best Long signal one could ask for is oil approaching or even breaking $40
Why?: As oil approaches $40 all (or almost all) NSA will just not be able to accept the negative returns associated with the cost of producing another barrel. While State actors will have to continue to produce they will reduce the amount that is released until prices increase. Since NSA are accounting for an ever increasing percentage of oil produced, it is the actions of NSA that matter. In short, the NSA has a profit and loss incentive and will not continue to pump oil if their losses continue to increase (until such time the cost of a barrel of oil decreases but that is not going to happen in the near future). This is not to say they will 100% stop, but they will drastically decrease production and that is the key.
Go Short: As oil approaches $80 one should go short on medium term contracts. (If oil were to hit $75 tomorrow I would be short CLZ2019 and CLF2020. While I wouldn't be short nearer term contracts if the price broke $80 -for several reasons happy to explain separately- as I would when the price falls below $40, I would increase my short position on CLF2020 and CLG2020)
Why?: As oil approaches $80 every producer can make money on each barrel and will increase production accordingly. Once again, the NSA is key. The NSA will open closed wells, increase production and take advantage of the higher prices. Even if State Actors maintained current levels of output, NSA have absolutely no self-interest in doing so because a barrel not produced is a dollar of profit not realized. In other words, the NSA will "Get while the getting is good". This will drive up production, production will outstrip demand and the price will fall. For many reasons (again will explain separately if one would like) there is no way to control the actions of the NSA. In the long run, the NSA is the NSA's worst enemy when it comes to price.
In fact, $80/Barrel would be a great indicator to go short CL (again, unless there is a generational type of event that drastically constricts the flow of oil)
Until the cost of extracting oil gets much cheaper, the price of oil will yo-yo between $40-$80.
I currently do not have any open positions in CL and I want to make clear that this is NOT my theory (although I believe in it as if it were mine). Anyone who tells you that oil is going to go below $40 and stick is either short, ignorant or just plain stupid.