On Tuesday Iran wrote a letter to Saudi Arabia asking them to curtail their oil production by as much as 1 million barrels a day, which is much more than the Saudi's are willing to cut production according to Reuter's sources.
That news sent the price of oil down 3.91% while Brent fell 3.77% on Tuesday. This followed a meeting which sources say took place on Monday between Saudi Arabia, Iran, and Iraq, the Organization of the Petroleum Exporting Countries three largest producers. OPEC is set to meet Wednesday, November 30th to discuss plans on how and who will cut production in an attempt to increase the price of oil. The announcement that a production cut would come at the November meeting was announced weeks ago when OPEC meet briefly.
At the time some experts said a production cut would be hard to come by since none of the three big countries wanted to give up production, but despite doubt, the price of oil jumped to $50 a barrel on the idea that production would be reduced. Now that we are in the midst of the meeting and things don't look good for a production cut, oil is trading erratically and there is money to be made from the uncertainty.
While I certainly can't tell you which side of the trade you should be on, I can give you a few ideas of how to trade rising or falling oil prices moving forward.
Your first option is simply to buy the United States Oil Fund (PACF:USO) or the United States Short Oil Fund (PACF:DNO). The USO and DNO are funds that have investments in the futures markets of oil and track the day to day price movements of WTI light sweet crude oil delivered to Cushing, Oklahoma. The USO is long WTI while the DNO is short WTI. So simply if you think oil is going to go higher, buy USO or if you think the price of oil is going to fall, buy DNO.
Another option you have is to buy some leveraged and inverse ETFs. You can go with a 2X leveraged long position with ProShares Ultra Bloomberg Crude OIL ETF (PACF:UCO) or the 2X leveraged short position like ProShares UltraShort Bloomberg Crude Oil ETF (PACF:SCO). Or if you really feel confident with which way the market will move you can buy a 3X leveraged ETF like the VelocityShares 3X Long Crude OIL ETN (PACF:UWTI) or the VelocityShares 3X Inverse Crude Oil ETN (PACF:DWTI). While the 2X ETF's will move twice the amount oil moves in a day, the 3X ETN's will move three times the amount. So if crude falls 3% and you owned the 3X Inverse Crude Oil ETN you will make 9%. But the opposite happens if you own the 3X Long Crude Oil ETN and you would lose 9%.
The leveraged ETF's can be more profitable but much more risky. Furthermore due to the way the fund manager has to buy and sell futures contracts in order to give you a leveraged return, the fund will spend a lot of money and essentially reduce its own asset amount even if it's making a decent daily return. So because of that, these are not good buy and hold options, they should only be used for short-term trades.
And lastly, you could just go with an oil and gas energy sector ETF like the Energy Select Sector SPDR Fund (PACF:XLE) or the SPDR S&P Oil & Gas Exploration & Production ETF (PACF:XOP). Both of these are ETF's are long the actual oil and gas companies, which will be positively affected if the price of oil goes higher. So buying one of these funds gives you the ability to play the oil markets move, but still own actual companies, not just the commodity. If you want to take this strategy one more step, you can buy either the Direxion Daily S&P Oil & Gas Exploration & Production Bull 3X ETF (PACF:GUSH) or the Direxion Daily S&P Oil & Gas Exploration & Production Bear 3X ETF (PACF:DRIP). These ETF's will give you 3X long or short leverage to the oil and gas companies.
Regardless of what you decide to buy or not buy, the next few days and weeks may be wild for the oil markets and it is certainly going to be fun to watch.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold any positions at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
