Best Way to Profit from Over Valued Oil Prices

Best Way to Profit from Over Valued Oil Prices

Oil prices have increased dramatically over the past few months and Goldman Sachs Group GS is now calling for $200 oil again. If that isn’t a huge reality check than I don’t know what is. Last time Goldman Sachs had an analyst made a prediction like that the peak of the oil market occurred and prices tumbled off a cliff.

The problem I am having with a $200 oil prediction is exactly what fundamentals are providing for such a scenario?

First, even if the US economy recovers from recession it will not demand the same amount of oil energy as before the recession began. People’s mentalities have changed and with that their habits have been forever altered. Why put yourself on the line to buy a new SUV that sucks back gas when gas prices may again go through the roof? The notion is still on the tongues of consumers in America and caution will keep them from suffering the next oil price shock in the near term. Even if the demand did come back that would through the United States back into an inflation spiral that leads back to recession, lowered demand again and so on.

Second, where has all that oil supply gone over the past 8 months? Just 2 months ago all that was heard in the media was ‘all the oil tankers have been leased up to store all the excess capacity.’ On which spreadsheet can you see where all that supply is stored? It’s definitely not shown on the US weekly oil storage supply reports. This oil is just sitting there.
Supply is still fundamentally way out of whack and demand still weak, so why have prices increased so dramatically? I think it all boils down to greed and this is producing an oil bubble that I think will burst before the end of the year. So if you are thinking about buying Suncor (SU), Exxon Mobile (XOM), Chevron (CVX), Beyond Petroleum (LON:BP), or even Royal Dutch Shell (LON:RDSA) think very carefully.

Whether you own any of these stocks or you think oil will be back in the dumps anytime soon there is a very easy way to leverage and contain your risk to make a potential windfall. To do this I have a simple strategy, Buy Put options on levered Energy Bull ETF out of the money some time after Christmas.

Why Put options on the Levered Energy Bull ETF you might ask?

1) A Direxion Daily Energy Bull 3x Shares (ERX) because it is levered 300%. Levered means this exchange traded fund is paying interest costs for a loan and this will subtract from the funds performance whether good or bad.

2) The Direxion Daily Energy Bull 3x Shares (ERX) is very well diversified. The Top 10 Holdings include: XOM Exxon Mobile, CVX Chevron, COP Conoco Phillips, SLB Shlumberger, OXY Occidental Petroleum, APA Apache, DVN Devon Energy, APC Anadarko Petroleum, XTO XTO Energy, and MRO Marathon Oil.

3) Buying puts that are out of the money because then your total dollar risk is low while a significant correction in oil will produce a win fall profit.

This Article is Featured in Festival of Stocks 155.