Doc's Diamonds

Oil and Gas ultrashort update

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Here's to the poor rating I will get on this post!

I realize that I continue to ride against the rising tide of oil prices and my ultrashort is getting killed at present. As such, I have been slowly adding to my position as it drops and lowering my basis. This will make a profit from this position much more likely if there is any pullback in oil prices. This is a bit different than "catching a falling knife" which is not a good investment concept. Oil has strong fundamentals for price rise and will, I believe, reach $150 per barrel even if the dollar strengthens.

However, I strongly feel that this rise is too far too fast. I am not alone in this belief. Many analysts are agreeing that a short-term strong correction in oil prices is likely soon. Most now believe that oil will not drop below $100 per barrel though. Some are calling for a fall down to $80 per barrel. I am not one of those. I believe that $100 per barrel of oil is now, unfortunately, almost a certainty. The primary reason is rising demand in the emerging markets (eg China) and very little increase in the supply of oil. The Petrobras find is a great one, but it will take mucho bucks to find a way to extract that oil. This will tend to support prices instead of lowering them as more supply normally would.

This ultrashort on oil and gas is not intended to last for the remainder of the game. I will look for a profit and then close out the short ETF and flip to going long on oil services. This will primarily be deep water drillers and NOV (National Oilwell Varco). NOV, subsequent to the purchase of GRP(Grant Prideco), is a very strong provider of oil well manufacturing and replaceable parts for deep water and offshore drillers. Only time will tell if this gamble on an oil pullback will pay off.

Thanks for listening.

Doc