You were right, and continue to be right. As long as you don't use leverage that entirely wipes you out during a temporary decline, for who knows what possible reason. Do you own your contracts outright?
Absolutely not, that would require me to put up 45 contracts * $72 = 3.42 million. The beautiful thing about futures is that they allow you to leverage. And in a highly inflationary environment, that is how people get rich. That said, it is imperative not to over leverage otherwise you can get wiped out.
If I told you about a stock that was selling at $20 and in 2 to 4 years that it was going to be at $70, you would probably be interested.
Crude Oil Futures are that stock but the investment merits are even better than that. To buy a futures contract you have to put up $4,050 and always keep $3,000 worth of equity. Each contract represents 1,000 barrels so for every $.01 move you make or lose $10. If you put up the minimum equity of $4,050 and the price of oil moves against you $1.05, that would wipe out your $1,050 buffer and you would get a $10 margin call for every $.01 the price fell below that.
I am not advocating putting up the minimum margin. If a speculator put up $20,000 per contract and bought 5 contracts at $70, the price of the contract would have to drop down to $53 before his buffer would be wiped out. I personally don’t believe the price will go that low, but if it did it would be a short-lived event. I have other capital that I can transfer over if this unlikely event took place.
Using the above example, the speculator could put up $100,000 to control 5 contracts at $70. The 100k doesn’t have to just sit in the account doing nothing. You are allowed to buy Treasury bills with the money while you control the oil futures contracts. This allows you to make some interest in the interim period. If the price of crude goes up $20, the speculator would double his money to $200,000. He would then be allowed to buy $200,000 worth of treasury with his new equity earning even more interest – or he could pull his original $100,000 out of the account. If my price target of $120 per barrel is met, the speculator would make $50 per barrel or $250k – the equivalent of a $20 stock going to $70.
Most people think commodities are risky or dangerous. Buying a crude oil contract is just like buying 1,000 shares of a stock priced at $70. Only instead of having to put up 30%-50% of the money you only have to put up about 6%. Plus instead of having to pay margin interest because you are leveraged, you get to earn interest on your money. Obviously the low equity required creates many hazards for the foolhardy.
It is obvious to me that in the future the governments of the world are going to continue to increase the taxes on the production of oil and natural gas as the price continues to climb higher. This is going to exacerbate the situation because the producers are going to have less money to invest, hampering new production and thus creating even higher prices. This will also negatively impact the share prices of the producing corporations. Whenever the government makes the cost of doing business higher, the net result is you get less production.
I believe that Crude Oil prices are going significantly higher. IMO, the best way to profit from this is investing directly in the commodity. I believe the December 2011 and December 2012 are the way to play the world's coming realization of peak oil. These two contracts are far less volatile than the front months (reducing the chances of a margin call) and they should be in the sweet spot when peak oil is recognized as fact. |
