Time to Sell Oil?
Wednesday, November 25, 2009 | Teeka TiwariRating:
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Crude oil prices could be in trouble. The recent break below $78 per barrel could portend lower prices for black gold.
But what really has me bearish on crude prices right now is the U.S. dollar.
The dollar has been getting smacked around and, yet, crude oil still can’t rally on the most recent dollar weakness.
That’s a sign that something is really wrong with crude.
Oil is typically hypersensitive to movements in the U.S. dollar. If you look at the oil stocks -- both the producers and the oil-service players -- they are currently on a "sell" and are going lower.
This points to one of two most-likely scenarios:
- Either the smart money thinks that the U.S. dollar will rally,
- Or (and more likely in my opinion) the global recovery won’t be as robust as advertised.
Don't 'Bank' on the East to Save us
If you want to see the future, you need to look to China. And what we are seeing over there doesn’t bode well for the rest of us.
Much of our recovery is being driven by Asian growth. This growth story looks to be imperiled, at least over the short term.
It appears that China’s central planners are getting concerned about the pace of China’s economic growth and are taking steps to curb that growth.
The most-concerning measures being considered are the rumored new banking rules that will require banks to raise their capital ratios to 13%.
This acts like a big old anchor on economic growth, as banks are forced to either slow the pace of their lending or else raise gigantic amounts of new money.
So far, the 13% number has been denied by one of the big Chinese state banks, but that wasn’t enough to stave off a 3.5% sell-off on Monday night. The market sees that there is a good chance we will see China impose strict lending curbs just as it did back in 2007.
A Retreat of the Emerging Markets?
We’re also seeing Brazil (another engine of growth) attempt to slow down investment in its country via the introduction of higher transaction taxes.
Why is this important?
Emerging-market demand is THE story behind oil's momentous move higher.
If the emerging-market economies are consciously taking steps to slow their growth, how can this not negatively impact crude oil prices?
Go Short When Recovery is a Long Way Away
It’s going to take a move above $83 to get me to cover my oil shorts and get me bullish on crude again. In the interim, it looks like a terrific short on any kind of strength.
I prefer to short crude directly in the futures market, but if the idea of trading futures fills you with fear and dread, don’t worry!
Instead, you can use an Exchange-Traded Fund to play oil prices. My favorite oil ETF is the PowerShares Commodity Trust Oil Fund (Symbol: DBO).
Commodity ETFs have been having a tough time dealing with contract roll spreads (i.e., selling their front-month contracts and purchasing the next month's contract), and that has been playing havoc with their performance.
DBO has been doing a much better job managing its contract rolls than the more widely known U.S. Oil Fund ETF (Symbol: USO), the latter of which was investigated by the Commodity Futures Trading Commission earlier this year for a "roll" it did back in February.
Avoiding challenges with their "rolls" are why I would suggest staying away from USO and using DBO if you're looking for an oil ETF to play.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
