Valuation analysis for United States Oil Fund LP (ETF) (NYSEARCA:USO)
The volatility in United States Oil Fund LP (ETF) (NYSEARCA:USO) prices recently has prompted me to reiterate some of the points I have already made, but points that also deserve reiteration after we see wild moves like we have seen over the past few days. I think i was also very specific in my Outlook For 2015
To begin, my stance is that OIL prices will be substantially higher by the end of the year and I think OIL is a good trade for this next 12 months' duration.
However, the volatility is not likely to go away until the first half of the year is over. I'm using that as a rough estimate, things could calm down sooner, but it will require a material change in the business operations of many of the frackers and smaller drillers who were flooding the market would supply (that is already happening). OPEC will not step in and support prices when they know that prices are going down because of an oversupply induced by smaller firms who can only make money if OIL is at much higher prices.
I used Saudi Arabia as an example, and it's a good one, because they are not going to blink an eye at these falling OIL prices because they can produce OIL at much lower prices than most of the competition. The choice they are making is clear; they are letting OIL slide so those firms who have been flooding the market go bankrupt. It is really as simple as that.
Yes, that means the industry is a risky one, but it also makes the probabilities of higher OIL prices down the road extremely high. If these firms who have been causing the oversupply fall off the map the oversupply problem will no longer exist.
Ultimately, OPEC wants to support OIL prices, they are probably very willing to do it if there wasn't this oversupply issue, and they may even step in and do it again after some of these firms fall off the map as well. Their goal is to not lose market share, that is very clear, but also they are not interested in supporting these smaller firms whatsoever.
Of course, when I talk about smaller firms I should also include countries, because there are some countries that fit this description as well, so please understand that my observation entails both.
That tells me that OIL is likely to be much higher down the road, but the volatility we have seen recently has stirred the pot enough to make people wonder what they should be doing.
In fact, I am hearing smaller traders repeat the same thing over and over again; it is as if they are suggesting that the market cannot go up unless OIL prices go up. Although that seems to be true on a daily basis recently, the S&P 500 certainly seems to be under pressure today because OIL prices are getting hit hard, my outlook for 2015 Special Report suggests almost exactly the opposite overtime.
As this year progresses and if OIL increases like I think it can the higher gasoline costs are likely to dampen consumer spending much more than the lower gasoline prices recently influenced them to open their wallets. I firmly believe that higher gasoline prices later in the year, they don't even need to be at all time highs, will impair the consumer psychologically. Gasoline prices have been extremely low, we're paying half of what we're paying before, and although you and I might not be too concerned when gasoline prices increase by 20%, most of America is. Most of America recognizes when they have to spend an extra $10.00 to fill their tanks.
Admittedly, I was certainly surprised that consumer spending data was not stronger than it was during OIL's decline because when consumers have more money in their hands, in this case due to lower gasoline prices, they usually like to spend it. I didn't see that across the board, but we can see that in Disney and Apple, so maybe these guys we're saving that money to go to Disneyland and to buy an iPhone.
My point here is to make sure that you understand that I am not trying to predict day to day OIL prices, that is not why this has been called as the Stock of the Year, but instead we are looking out towards the end of the year for material gains in this position. If I am right we will hit a home run, if I am right and we hit a home run pressure is likely to mount on the consumer too, causing pressure on our economic system accordingly.
This is not the sole catalyst of course, there are other reasons why I think this year is very risky, but my effort here was to make clear again my comments on OIL. I think it is great for a hold through the end of the year but I am not trying to trade it. I think it is all over the map and rather haphazard. The Markets themselves are being much more precise lately, so there is not reason to be distracted or tempted by OIL's volatility. From a trading perspective, there are far better ways to make money I think. We should just sit on our OIL positions, expect volatility, and look forward to the end of the year with that position, while taking advantage of the markets relative predictability in the meantime.
Disclaimer: Stock Traders Daily provides trading strategies, which by definition incorporate risk controls, and it has only engaged in buy and hold strategies twice since the turn of the century. The first was in October of 2002, and those buy and hold strategies lasted until 2006, and the second was in February of 2009, and those buy and hold strategies lasted until the end of 2010. Every point in between Stock Traders Daily has been providing risk controlled strategies, market based strategies, and strategies for approximately 3000 individual stocks, which are unbiased and which incorporate the notion that short term gains lead to long term success. There is a time and a place for buy and hold strategies and this is neither the time nor the place for that approach in our opinion. Risk controls are essential.