Is it Time to Short Oil?
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Jonathan Yates
Is it Time to Short Oil?

The Wall Street Journal headline story by Keith Johnson and Russel Gold was, “U.S. Oil Notches Record Growth.’

The article detailed how American oil production increased the most in history last year.  That was, in large part, due to the advent of fracking.  So successful is fracking in uncovering new fields of oil that a recent article in Harper’s magazine stated that it was more like plumbing, than drilling.   Even with the higher production, however, the exchange traded fund for oil, United States Oil (NYSE: USO), is up more than 2.3% for the last week of market action, and over 8.4% for the last six months.


That naturally raises the issue of is it a good time to short the USO, and oil stocks in general.

In his recent column, Forbes publisher Steven Forbes pointed out how commodity prices have fallen.  That is a result of the surge in the sector as a result of the quantitative easing measures from central bankers around the globe.  These actions resulted in investors fleeing paper currencies for hard assets such as gold and oil.

As the chart below shows, gold has collapsed but oil has remained strong.


There are many reasons for this state of affairs.

Oil has a more utilitarian use than gold, which is almost used entirely for jewelry and investment purposes.  In addition, many companies in the oil sector pay generous dividends, which are very much in demand in today’s low interest rate environment.  That could prop up the price of Exxon Mobil (NYSE: XOM), and other “Big Oil” firms.   But for those looking to gain from a fall in the price of oil, going short on the USO could be the way to profit.

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