Is it smart to short oil futures?

Question

Ok, so for now the world market on oil is skyrocketing, right? Probably
in part due to the fact (to name a few things) that the average car
consumes more gas than it did 20 years ago (24mpg now instead of 26mpg in
1987), the fact that the booming economy promoted high spending on big
SUV's and other gas guzzlers in the past years, the fact that as our
cites get larger commuting mileage and time increases, and a result of
the US having more toys consuming excess energy than we know what to do
with (to name a few things). Well what is going to happen when all the
automakers start coming out with 70-100 mpg cars and other industries
begin to promote higher energy efficiency and/or alternative energy
sources (and build new nuclear reactors)? Isn't that going to dwindle the
demand for oil by more than half? Shouldn't that be reflected by a drop
in oil prices? If so, wouldnt selling the oil companies short when we
see the 200 day moving average price peak be a smart bet, or perhaps
investing in companies that profit directly from oil prices dropping (like
power and/or natural gas)? We should try and think about the effects
these high mpg cars and other energy saving applications will have on
industry and invest in what makes sense. Who spends the most on fuel? When
the price eventually drops they will be making all that much more
profit since we know they would never give any price breaks.

There has got to be money to be made here. Perhaps looking at what made
money in the early 80's after fuel hit its last peak cycle and dropped
in price.

Any ideas on where the most money would be made from oil dropping and
energy usage becoming more efficient.

Answer 1

Aside from high demand in the US, the increase in oil prices results from the rapid growth in the Chinese and Indian economies. There are millions (probably hundreds of millions) of people in those countries who are becoming more affluent, consuming more goods in general and are now thinking about going out and buying cars. Even if Americans can significantly reduce their fuel expenditures (and lets face it our track record in this area isn't great) there are millions of people who aspire to an American standard of living and will need oil to provide it. Another consideration is 'peak oil'. There's only so much oil underground, society has used up a substantial amount of the easily available oil, which means that over time it will become harder (and more expensive) to find enough oil to feed the world's needs. Also a lot of the world's oil is located in politically unstable areas-- betting on peace in the middle east is a dicey proposition. Frankly I'm making precisely the opposite bet from you.

As a general note if you still want to bet against oil, you might consider not buying it directly, but instead investing in a company that will benefit from reduced fuel costs (Southwest Airlines for example) or short a company that benefits from high oil prices (ie just about any oil company.) Frankly though I really do not recommend betting against high fuel prices.

Answer 2

Not so fast...

There are more questions about the future of oil prices than answers.

The run-up in prices over the last couple years has been more because of the growth of the Chinese economy than anything else. The Chinese are using MUCH more oil today than a few years ago as they become a more capitalistic society and own and drive cars more. That is not going to change.

There are political uncertainties with Iran, Venezuela, and Iraq, all major oil exporters.

Hurricanes can disrupt the infrastructure again.

On the other hand, with crude prices where they are now, extraction is likely to be increased, which would likely raise inventories faster than consumption increases.

With all due respect, I believe you need a better understanding of the oil market. Your assumptions and analysis do address some peripheral considerations, but miss many of the more important components of the puzzle.

Read Daniel Yergin's exhaustive 1992 Pulitzer Prize winning book "The Prize; The Epic Quest for Oil, Money, and Power", and/or other literature about how the oil industry works, and you will be much better informed for making investment decisions in the oil business.

Answer 3

To be honest I wouldn't short oil futures. China, one of the largest economies in the world is growing at phenominal rates. They would have purchased every engine Cummins can manufacture but they had to place some restrictions on how much they would sell to China or they would risk losing out in all other markets. So China is growing and adding many vehicles on the road, as is India. Other countries are in the process of industrializing as well. By the time 70-100 mpg vehicles are widespread on our roads, the number of additional vehicles using oil will be astronomical. Eventualyl we have to get off oil and go towards electricity from solar sources but until that time I don't see oil going down. I could be wrong, but I wouldn't bet against it.

Answer 4

you possibly can say that the Iraq warfare become no longer about getting Iraqi Oil to flow into U.S. clients gas tanks. What can't be disputed is that Dick Cheney and the Oil company Executives met in March, 2001 to devise dividing Iraq's Oil fields. administration of the Oil Spigots to learn U.S. Oil businesses is diverse than any earnings to U.S. clients. A tightened administration of the spigots will enhance prices and salary. The Hydrocarbon Benchmark that both Bush and Hillary are urgent Iraq's authorities to pass is about privatizing Iraq's oil fields. "except for 3 scant strains, the total 33 web page "Hydrocarbon regulation," is about coming up a complicated criminal structure to facilitate the privatization of Iraqi oil. As such, it in crucial that one and all persons heavily study the Iraqi Parliament's bill because the Congress is on the record in promotion oil privatization. This warfare is about oil. " Dennis Kucinich in Congress

Answer 5

In my personal opinion, shorting is never a wise trade to open. If you get stuck in a short, and if war breaks out in the middle-east (ex Iran), and oil jumps to say... $110 barrel, you'll take a hard hit.

I just don't see oil pulling back in the near future. Not until alternatives like ethanol really start to become a major player in the energy market.

Answer 6

I don't think shorting oil futures will ever be a good strategy unless you have advance knowlegdge of a technological breakthrough which will decrease the dependence on oil. It sounds like a good way to go broke.

Peak oil will see the price of oil increasing until no one can afford it.

Answer 7

No.