How The Heck Do You Trade Oil?

| November 21, 2014 | 0 Comments

One of the biggest surprises in the financial markets in 2014 has been the collapse of crude oil prices. In mid-June, West Texas Crude was trading at over $105 a barrel. Barely five months later, the price has dropped below $75.

Oil hasn’t been this cheap since 2010. The mind-boggling plunge has caught many investors by surprise. There are many who thought oil would never be this cheap again.

Yet, black gold still may have farther to fall!

Basically, the supply of oil is far exceeding the demand. As long as there is a global supply glut, oil will stay cheap or even see additional price declines.

It’s funny… Oil production had supposedly peaked. The experts said we wouldn’t be able to keep up with global demand. Looks like the experts were dead wrong.

Of course, fracking and shale oil drilling certainly is playing a part in the increased supply. Improvements in deep sea drilling technology have helped as well.

However, those more expensive methods of oil production won’t remain profitable if the price of oil continues to fall. In fact, certain operations may already be losing money.

If expensive production facilities begin to shutdown, will that cause the price of crude to run higher? Or, is there so much oversupply that the price of crude takes an even bigger plunge? Maybe oil’s just going to trade sideways for a while…

So how in the world do you trade oil right now?

Well, for me, crude always used to be a put selling opportunity whenever the price made a significant down move. However, the algebra has changed. Given the recent supply numbers, you can’t rule out a bigger move down.

On the other hand, global demand for oil is increasing over time. Emerging markets will need more and more fuel as they grow. And, oil is still the obvious choice. But, it’s not going to happen overnight.

Here’s the thing…

I believe oil is going to rebound, but it may not happen soon. As I just said, global demand is going to overtake global supply at some point, especially if more expensive production methods stop being used in the short-term.

As such, a long-term upside bet is the way to go. I suggest buying call LEAPS on an oil ETF. You could go with Big Oil companies or smaller drillers as well. But, ultimately I think the safest route is investing in oil itself (using an ETF).

Yours in Profit,

Gordon Lewis

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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