By Gulshan Malhotra
Oil prices have settled and are ready to go in north direction. Oil’s bottom prices were around $44 not long ago. Then it rebounded to around $50. After the hedge fund interference it jumped to $58-$60. The rigs cuts has still not reflected in the oil price. The theory goes in the way that the first rigs will be reduced then inventory will reduce. In the end prices will shoot up. At present rigs reduction phase is over and reduction in inventory phase has started.
I believe now is the time to enter to take advantage of the reduction in supply which will increase the price.
The question is how to invest in the oil. There are different ways to invest in the oil either through investment in oil companies or through investment in oil ETF.
This time I recommend UCO ( ETF) by way of buying UCO and sell its call options with strike 10%-15% above current price with expiry date in Jan-2016. The premium you get will be around 15%-20% which is high in range. This premium is generally for normal stock which has a beta of 1.5 is 10%. In this way 15% is guaranteed return and 15% return is dependent on the theory. Your maximum return is 30%. 15% and 30% return is for six month. The annualised return will be 30% and 60%.
I did invested last week in UCO and will sell the option this week.
Oil demand and supply imbalance created volatility in oil price. This was mainly due to increase in supply side. When supply increases, the prices goes down. The question comes how much. The cost for US oil producers is $40 – $45 while cost for middle east oil producers is $10 – $20. Price required for oil producers to make profit is $50 – $55.
In my opinion, before prices were driven by OPEC (middle east cartel) which now prices will be driven by US oil producers. Since there required price is higher than middle east oil producers. US oil producers does not have any cartel rather they work in and as open market concept where market decides the price.
At here implicit price required by US producers is $50 – $55.
Validation of my theory or understanding is drop in rigs started when the oil price was around $55.
In short run, the oil price will remain in the range $50-$60. If US makes cartel, the story will change again. Otherwise, with current scenario, I see oil to stay within range. Let me put it in another way, oil entry point is $50 and exit point is $60.
The symbols where oil is the driver are SU, UWTI, LEG.TO, LRE. TO, LTS. TO and XOM
By Gulshan Malhotra