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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (83661)	4/27/2007 12:26:12 AM
From: Umunhum	Read Replies (3) \| Respond to of 206328

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. I think you’re data mining. I’m not advocating buying the front month and rolling it forward every month. Let’s take a real life example of a leveraged holder – Me. I bought a Dec 2012 CL contract on 8/1/2006 for $70.10. I almost bought at the peak – at the trough in late September of last year and early January the Dec 2012 contract got down to $59 and change – for a total draw down of $11,100 plus the required margin of $4,000 per contract. So to I needed $15,100 per contract to protect the position I bought at the top. In case anybody thinks they would avoid all this problem with "tight stops", they should be informed (as Umunhum and i know) that the long dated 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. This is all true! I agree that it would be foolhardy to purchase a contract and think that $4,000 would be enough to protect the position. It would only be a matter of time before such a speculator got wiped out. I think that you should scale into a position adding more contracts as the prices goes up and you have more margin available to you. During the last move $15,100 was enough, so to be safe have enough free cash to protect 20 points – 25 points? I don’t know. I am still holding the ’08 and ’09 contracts that I bought when oil was in the high $20’s to low $30’s – so I have some margin to play with. I believe the 2015’s will eventually trade for more than $150. Right now they are priced at $67, so there is $83,000 worth of profit in each contract if my price target is met. I highly doubt that they will ever trade below $55. If I’m right – you would need $16,000 per contract to protect the position. (16k gets you $83k in 7 years and potentially a lot sooner) The great thing about futures is that you can leverage. And as oil continues its inevitable climb this safety cash could be deployed elsewhere. I keep asking myself, where is the best place to put money if oil is going to $100 by 2010-2012? I am also a big believer in COSWF. In their latest investor presentation COSWF said that they estimate that their free cash flow available to pay down debt or distribute to unit holders at $1.25 per unit based on a WTI price of $55. Every $1 per barrel move in crude oil prices impacts cash from operating activities and free cash flow by about 7 cents per unit. So WTI at $100, $125, and $150 would look something like this: .........................................................Year Crude price per barrel........2010 .......2012 $100 ....................................$4.40 ..... $5.03 distribution per share $125 ....................................$6.15 ..... $7.03 $150 ....................................$7.90 ..... $9.03 The 2012 column reflects COSWF’s percentage of the production increase due to come online in 2012. Even if oil only makes it to $100 and stays there, a $5 annual distribution with a reserve life of over 50 years makes COSWF at $27 a unit a pretty compelling investment. If anybody is interested in the latest COSWF presentation: cos-trust.com An Interesting blurb from Greyzone from The Oil Drum that explains the inevitability of Peak Oil: The 20 largest fields account for 20% of all oil produced today. The top 1% of all fields (507) account for 60% of all oil produced today. This means that the other 49,500 fields account for 40% of the oil produced today. To replace the top 507 fields, almost all of which are in decline, you would need another 70,000 small fields. But worse, unlike the giant fields which last decades, the new fields last about 9 years tops so you have to find more and more and more of the small fields to break even. Small fields are irrelevant to the overall picture of decline. Small fields cannot even slow decline because you would have to find about 124,000 of them every 9 years just to stay even. You need to find 37 of these small fields every single day from now til you stop using oil, just to stay even. And let's not even talk about growth...