Speculator’s Corner: Cash In On Oil’s Next Surge
Oil speculators are nearly universally despised for their perceived role in soaring oil prices. But if you can’t beat them, you might as well join them.
As you know, hedge funds and other institutional investors place huge bets on oil prices in the futures markets. But they don’t actually own any oil. They’re simply hoping to profit from the price fluctuations of the commodity.
Here’s the problem…
Collectively, speculators’ bets on higher oil prices can have a huge impact on oil prices.
According to a study by Goldman Sachs (GS) last year, each million barrels of net speculative length can change the price of oil by as much as 10 cents per barrel.
In other words, when speculators are ‘net long’, more of them are betting on oil prices going up than down. And more often than not, they’re betting on higher oil prices in the future.
As a result, oil often trades at a premium of $10 to $30 above where it would if speculators weren’t betting on rising oil prices. Obviously, that puts speculators at odds with anyone who would like to pay less for oil or any of the products that are made from it.
Here’s where it gets interesting…
Speculators have slashed their net long positions in recent months.
In mid-March, speculators held 420,536 long positions in NYMEX WTI Crude Oil and just 101,991 short positions. So, speculators were net long 330,525 oil contracts.
According to the latest data, speculators now hold 347,026 long positions in NYMEX WTI Crude Oil and 113,617 short positions. Speculators are now net long just 233,409 oil contracts.
That means speculators net long position in oil has fallen by nearly 30% since March.
And guess what?
The price of a barrel of WTI crude oil has fallen 22% from $107 to $83 over the same time.
Here’s the thing…
The last time big funds had so few bets on rising prices was in November of 2010. And crude oil prices were around $80 then too. Then over the next few months, speculators came back and oil prices soared to $115 per barrel.
I think we could see a similar speculator driven rebound in oil prices this summer.
Buying cheap out-of-the-money call options on the United States Oil Fund (USO) is an easy way to speculate on rising oil prices. USO currently trades at around $31. Take a look at the USO October Calls with a strike below $39 and trading for under a $1.
If oil prices rebound this summer, you can thank the speculators instead of cursing them every time you go to the gas pump.
Good Investing,
Corey Williams
Category: Speculator's Corner
