as you know i am as much of a peak oil clown as anybody, so you don't need to convince me of the bullish prospects for oil (although you did a good job of presenting the facts and i never tire of seeing them :).
the thing for me is, how does that translate into investment action? rule number one is: NEVER BLOW UP. the ultimate irony would be to be right about the big picture but wrong about the implementation and end up going BK when you could have gone to the moon.
he world is using over 30 billion barrels a year of oil and finding less than 10 billion – that’s not sustainable.
these things were no less true last August. back then, June 07 crude printed around $81. then it lost 21% of its value in about five weeks. but it wasn't done there: after going nowhere for a few months it lost another 18% in the first two weeks of January. so the unleveraged holder would have had to endure a drawdown of around 35% (as we'll see below, the leveraged holder endured a much bigger drawdown, often to the point of being wiped out). let's say you need to keep 4K equity per contract to hold a position. in order to avoid a margin call, the buyer would have needed at least 32k of equity at the peak. at the nadir, he would have seen a drawdown from 32 to 4, which is an 87.5% drawdown. everybody with less equity per contract would have been sold out by the margin clerk.
and of course, at the nadir, the buyer has been clobbered for almost a 90% drawdown, and is on the brink of being wiped out, and now that it IS a good time to buy (mid-January, when the peak oil doubters are all calling for $35 crude), the guy who had 32K equity at $81 now has ZERO excess buying power.
now that crude has come back a bit, this buyer has about 16K equity. so he is still 50% off his value last August.
in case anybody thinks they would avoid all this problem with "tight stops", they should be informed (as Umunhum and i know) that the longdated futures are extremely illiquid. although they are priced every day so that the margin clerks can do their jobs, many days they are priced on ZERO volume, based on a "guesstimate" of their worth. where a distressed seller would be able to unload a position in a declining market is anybody's guess.
meanwhile, i look at my PF. it has been pretty consistently 50% energy equities for several years now. i did have a peak valuation last August, but i am already a little above that peak, despite paying taxes and living off my PF. the ability to add substantially to positions in the face of drawdowns led to a higher PF now. the drawdowns were "annoying" as opposed to life-threatening. i am pretty sure there will be more such annoyances in the years ahead.
i can certainly imagine scenarios where maximum risk will provide superior returns to what i've had. i can also imagine some rich person in the world would pay me $100 million if i "win" a round of Russian roulette.
but i can even more easily imagine scenarios where a highly leveraged futures PF results in a BK at worst and subpar returns at best. |
