Investment choices when WTI prints that ‘xx’ generational low

XX my price of oil

Unless human society finds 100% free energy or goes back to caves, fur and firewood, energy i.e. oil and gas, will never hit zero. Consider again that the high of WTI was 147.27 back in June 2008, the current price of $31 is an absolute steal at 79% discount.

However cheap can get cheaper and since the down trend is still strong at the moment, the trading decision should be a short. But buying is also an investment option over a longer horizon. We can pick and wait for a ‘generational low’ which is the price that is so low with some luck, we can consider to buy some, lock it away and hopefully price will never retrace back to that level in a decade.
(Note: Individuals should know that short and long are 2 different hats that one can put on, take off and change over. But never lose sight that they are different. The moment you mix them up, results could be disastrous.)

My own generational low is ‘xx’. I will share how much ‘xx’ is when when we get there. There are many things to prepare – get updated with the latest choices, set up relevant accounts if you don’t have them already, set aside funds and so on.

Crude oil monthly chart

This chart shows that if crude oil falls to a ‘90% discount’ from the top, price is around $15


How to do this trade when it gets to ‘xx’

  1. Buy WTI through MT4
  2. Buy stocks/options of oil-related companies
  3. Buy ETF or Exchange Traded Fund or their options
  4. Buy Unit Trusts (for Singaporeans and PR, this means CPF money can be involved)


List of ETFs

Since ‘which ETF’ is the most common question, I will cover this first. The other topics points 2, 4 may or may not be taken up later.

  1. United States Oil Fund (USO)
  2. United States Brent Oil Fund (BNO)
  3. Energy Select Sector SPDR (XLE)
  4. United States 12 Month Oil Fund (USL)
  5. S&P GSCI Crude Oil Total Return Index ETN (OIL)
  6. S&P Global Energy Index Fund (IXC)
  7. DB Oil Fund (DBO)
  8. United States Gasoline Fund LP (UGA)
  9. SPDR S&P Oil & Gas Explor & Product (XOP)


Issues involved in selection

  1. ETFs are usually designed to track an index. Understand which ones they track. Underlying may be oil futures (also depends on which one) or shares of companies (many different types of segment) in the oil space. Some are focused on a segment, some diversified.
  2. They are proxies of oil price but may not track oil price exactly.
  3. In addition, ETFs expose you to a different sort of risk, not the straight forward long-short WTI trade on MT4.
  4. There are tax issues involved depending on which country come from and where you are residing right now. Non-US citizens also got to deal with their FATCA nonsense.
  5. Which broker do you want to place the trade through, commission, leverage, and so on.
  6. Owning ETFs do qualify for dividends so return/yield also becomes a factor to consider.

There could be other issues but I have not the time to go through comprehensively so this is a topic to take up later on.


PS: Note that I categorise this post under long term investment which is why the issue of shares, ETFs and Unit Trusts come up at all. If one is short-termed minded, MT4 is already there for you.

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