1/16/15

LONG ERX ($50)

Due to multiple issues (supply, demand, geopolitical, speculation), oil is historically oversold. It will recover, it's simply a matter of timing. Both established and emerging markets need to oil to sustain growth indefinitely into the future. Technology may increase our extraction and usage efficiencies, economies may slow down periodically, but at the end of the day you have an ever growing demand for a finite resource. A 60% decline in six months is truly remarkable.

ERX is an ETF reflecting the energy industry with 3x leverage. USO is the popular play for rising oil prices, but it will not have a symmetrical return with oil. USO purchases future contracts where much of the expected rise is already priced in (Jan 2016 futures are trading for over $55). ERX is based primarily upon oil equities, but with a 3x multiplier. If this is truly the bottom for oil, ERX is the best way to play it, besides buying futures contracts directly.

Below are a few bullets to reiterate why I think we are close to the bottom.

• OPEC is manipulating the price to force out higher cost per barrel players. This is a short term attempt to raise market share. Their economies rely too heavily on oil to keep prices this low. 
• With the increased shale production, OPEC could have cut oil production by less than 2% to keep the market in equilibrium. By not cutting production even fractionally, a precipitous decline has ensued (60% decline is not a proportional response).
• Rig count is in free fall. Last week, the largest week-over-week decline since 2009 occurred, dropping to a 14 month low. This will continue as weaker players continue to take rigs offline. Less rigs means less oil extraction which leads to higher prices.
• Lower oil costs increases usage which increases demand over time.

I should have posted this yesterday since ERX is up 9% today.