The question of 2015 and so far for 2016 is where are energy markets actually headed? We actually wrote an in depth piece in December that's located within the TradersToolbox discussing a macro and technical outlook on oil markets and provided some ideas.
When you look at oil from a basic standpoint and see it at $26 a barrel you can pretty much say with certainty, and little research, that most companies in the industry cannot sustain with it trading at those prices. Now, you'll get the ivory tower types who will show you financial models, this reason, that reason etc. as to why or how it will be lower but there is really one thing and one thing only that matters: Price action. What is the price action of WTI Crude futures telling you? Well, it told us that $26 and $20 are/were levels to watch, and Goldman Sachs would agree as they released a chart for clients from their technical analyst team that leaked online.
You can click the image to make it larger.
This is similar to something we were looking at as well. With demand at/near the $26 area we were watching to see if, in fact, there would be buyers. Now with all things in the markets having an idea is one thing, executing on it properly is another. This is where many investors fail. It's not that your idea is not correct, it's that your timing may be off or the way you structure the trade is off. Wall Street is good at this, structuring ways to express an idea using different products, however, we can do that as well as retail investors.
With oil, there are a few options that I personally like:
- WTI Crude Futures - Margin costs vary from $1,000-$5500 a contract and it allows us to bet on future price of the price of oil.
- Well known oil companies: CVX, XOM & APA. These are market leaders, so we can trade them as they tend to move with oil.
- Options - Using options instead of shares on the above names to express the idea, be it buying out of the money calls or using short term trades to exploit the move.
- UWTI & USO - Two exchanged traded funds that track oil. One is levered, so it's to be used as a trading instrument, not an investment, at least for me.
The above photo is of Landshark Options Instructor, Ofir Varsulker from Vancouver, Canada. With this, he elected to trade shares of UWTI as we expected a move from the $26 area. (This is recent as of 2.12.16) - He also traded the WTI CL futures contract for a short term scalp during the session.
So, on one hand, you keep a 'core' position for a light swing trade and on the other you take in income with a short term (1-5 minute) futures trade. Again, this is different for each investor but when you understand the options available to you as to structuring a trade it makes that idea you have about a market move easier to execute, and execute with precision.