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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Crude Oil Prices Make for Profitable ETF Trades

Commodities / Crude Oil Feb 15, 2012 - 07:30 AM GMT

By: The_Energy_Report


Best Financial Markets Analysis ArticleToday's retail investors have more options than ever before, but there is a shortage of practical information on how to manipulate different investment products, be they ETFs, options or equities. Enter Roger Wiegand, editor of Trader Tracks. In this exclusive interview with The Energy Report, Wiegand discusses his methods for energy investment and how to set tailor-made time and price windows to realize solid gains.

The Energy Report: Roger, we are still in the early stages of 2012 and gas prices are near all-time lows, with a barrel of oil bobbing in the US$100 range. What approach are you employing to make money on oil without getting burned by gas, given that many names out there have substantial assets in both commodities?

Roger Wiegand: We have three trades on right now. Our futures trade is an oil spread where we buy a window of opportunity on price, which allows investors to fix their positions according to their own price constraints and risk comfort levels. We are looking for an oil futures price to high of $120 a barrel (bbl) for May to June of this year. Oil is around $100.60/bbl and there is very good support for oil right now. Over the years, we have found that oil will move in a trading range of $4 increments. We are in the middle of those increments now. I call it $98.50–102.50/bbl. As the cycle and the calendar move forward, we are looking for a high of $115–120/bbl for the first half of 2012.

For share traders, we have two positions in stocks, both exchange-traded funds (ETFs). One is ProShares Ultra DJ-UBS Crude Oil ETF (UCO:NYSE.A), and the other is Horizons BetaPro NYMEX Crude Oil Bull Plus ETF (HOU:TSX). The UBS Crude Oil ETF is a double-long position ETF on oil, meaning that if oil went up $1, investors would earn $2 on this particular trade. The Horizons BetaPro NYMEX, a bull-long ETF, is much the same. Normally, when we recommend a share in our letter, either an ETF or a company, our objective is to make +25% in 90 days. We can't always do it, but we do quite well.

TER: You trade all manner of ETFs: gold ETFs, oil ETFs and even a Canadian dollar ETF. Why do you find these instruments so appealing and what did you do before ETFs existed?

RW: Before ETFs, we would trade companies, using options and/or spreads on currencies and futures. It is very handy for a shareholder to buy an ETF because investors are basically buying an index or a bundle. Some of these holdings offer very attractive leverage; I like the ones that are x2 or x3.

One warning I would give is that there are so many ETFs on the market now that they are becoming diluted. We used to trade SPDR Gold Shares ETF (GLD:NYSE) for gold and iShares Silver Trust (ETF) (SLV:NYSE), but we do not recommend them any longer because they do not move as they did before. Other kinds of trades can give us a better position. SPDR Gold Shares and iShares Silver Trust have become elephants and it takes a lot of buying to create movement.

But, we are happy with our oil ETFs, and we like the Canadian dollar ETF because it is a way to park money in Canada, which we feel is a much better place than the U.S. dollar. Canada is a commodities-driven country and the Canadian dollar is strong with good underpinnings. We featured it a year or two ago in our newsletter and the traders that opted into it are now up over +20%. We also see the Canadian dollar going to 108.00 on the index. It is at about 100.48 right now.

TER: There is quite a media buzz about ETFs, but many retail investors do not have a thorough understanding of how best to trade them. Could you outline some must-have information for retail investors looking to play?

RW:Take the oil ETF, USB Crude Oil, for example. It is a double-long on oil. Normally what will happen with oil in the first half of any year is that it will start out slowly, go to a peak, then correct. There will be a correction when the refineries change over from heating oil to gasoline for the summer. If you can find two good long positions during the year—normally January to May, and September to November/December—and if you have a modest goal of making 25% within 90 days, each of those segments work quite well. You can do the same thing with gold. We have grain and corn ETFs too. The objective is to match up the ETF's price, buy it at the low and try to make 25%. Keep in mind those trades must fit the calendar cycles.

TER: What is the downside risk to ETFs?

RW: We do not look at gold and silver ETFs, but in our opinion—and I cannot prove it—the gold ETF does not have 100% of gold behind it for every share. If things got really dicey in the gold market, and they could as it is very volatile, there might be some difficulty in getting out quickly enough on an exit. There are probably better trades that you can work with to do that. The NYSE AMEX (NYSE.A) exchange lists the ETFs—you'd be amazed at the number available. People like them because they do not have to pick a company; you can just buy a market index sector, but some of these sectors will sit and not move. Sometimes an ETF or an index will only move modestly when the overall sector is moving a lot. You have to be careful.

As far as determining a good entry point for futures or stocks, you can take the high and low, add them together and divide by two. That will give you the mean and the point where you can match price with the calendar and decide where it could go from there. We get spots on the calendar during the year when we are too high on a lot of gold and silver stocks and, while we like the companies, you must consider the amount of potential movement to make money. If we can see only a movement of 5% or 10%, we will not take it. If somebody wants to buy it, we will say okay, but hold it and understand that there could be a couple of pullbacks before it goes up to the next price.

TER: Do you expect oil to outperform gold in 2012 in terms of percentage?

RW: It is hard to tell because the gold price is getting quite large. But consider that gold pretty much gave us 15+% for a whole decade from about 2000 to 2010. In the last couple of years, the return has been more like 17–18%. If you use leverage and spreads the way we do, and if you are a good stock picker, you can do better than that. We have had some stocks that we have been in and out of four or five times that have made 50, 60 and 100% every time. That is why in our letter you will see a lot of stocks that are negative right now being recommended at previous highs, but people need to understand that those who have been reading the letter for a long time have purchased those companies maybe two, three or four times and made some excellent gains.

TER: Natural gas prices are in the doldrums. How long do you expect it will be before gas prices begin to stabilize above $4 per trillion cubic feet? (tcf)

RW: It will be a while because of oversupply. About two years ago, two major natural gas wells were discovered in Louisiana. One thing that will push gas up in the summer is air conditioning demand. Air conditioning demand will cause power companies running power plants on natural gas to burn quite a bit more. What will happen then is the gas price will go up. We have been lingering at around $2.35–$2.50/tcf. It probably should go up maybe $0.25–0.30/tcf for the summer, but I cannot really see gas going back to $4–5/tcf for quite some time.

TER: That is unfortunate. What are some other ways that you have exposure to oil in terms of equities?

RW: One of the other things you can do is buy options on big oil companies. With some of the biggest ones, if you understand the calendar and the way their stock price moves within a window, you can buy an option for $1.50–2.50 and within 90 days, it will usually return 100%. They seem to work pretty well.

TER: How do you know when to get in and out?

RW: Again, that is the calendar. For example, say that you have Exxon Mobil Corp. (XOM:NYSE) stock. It has about $45 million (M) in cash in the bank. It is at a point where they are not spending a lot on exploration right now. They take cash and buy entire exploration companies, or entire major, proven energy fields, which is easier. Suppose we think that within a calendar window of about 120 days, a company has the chance to bypass performance and go up +$20. What we would try to do is look at our call option that would be close to being in the money, and buy one at the money or slightly above it for $1.50–2. Then, when the stock price rises up, the option goes up in value. Those have worked out pretty well. We had many of them, not only in energy, but also in gold and silver and precious metals companies like Goldcorp Inc. (G:TSX; GG:NYSE) and others in 2006 and 2007. The volatility and changing markets will go in and out as far as your ability to do this. We have been away from that opportunity for a while, but it is starting to come back again. Trading and investing strategies are in constant change.

TER: How do you respond to someone who says, "I don't trust newsletter writers because they often get shares in exchange for promotion?"

RW: I have heard that before. The answer for my newsletter is that I do NOT trade any of the shares, which is purely deliberate on my part. For ethical reasons, I do not want to be recommending shares or ETFs or anything related to shares and then buying them myself. Now, newsletter writers can do that legitimately. The good ones I do know, who do it legitimately, will make a recommendation and buy it themselves 10 days later. And, when they put out an order to sell it, they wait 10 days and then sell their position. Obviously, there is going to be some influence. All of us in this business know the miners, the companies and the officers. What I look at, being a technician, is if the stock does not move, I do not want it. Periodically, we will get one that is a good company but, for whatever reason, it just sits still.

TER: Can we discuss equities? What are some of your positions in the energy side?

RW: It is not in the letter right now, but we do like to trade Exxon because it is easy to trade. Some of the refinery companies such as Valero Energy Corp. (VLO:NYSE) and a couple of other ones have not done that well right now because the refining business is very competitive.

I would suggest that if readers are looking to buy shares in an oil company right now, one thing they can do is go toward the explorers. We have one good explorer in New Zealand Energy Corp. (NZ:TSX.V; NZERF:OTCQX). New Zealand Energy hit a big well. Its activities are confined primarily to the country of New Zealand, and it has done a tremendous job. This well is producing 550 barrels a day. It has a second well being drilled right now and their stock just took off like a rocket when the well came in. If you can find the right one, it is a wonderful thing to be an investor.

TER: How did you learn about that particular company?

RW: I was referred to it by a radio friend of mine who bought it. I looked at the chart and the website and studied it, and it looked like a super opportunity.

TER: What is the chart telling you now?

RW: The chart paused because it had a big ride in the value of the shares with that well coming in. There was a little bit of a pullback, but we are seeing what I call a continuation triangle in the chart right now. The chances of the next well coming in appear to be pretty good. We like the company and the management. We think that when that second well comes in, it will go up quite a bit more.

TER: On its website, the company says it has the stated goal of being the largest independent oil producer in New Zealand. As you have said to me in the past, you set a goal of making 100% every year. Do you like the fact that this is a lofty goal?

RW: Absolutely. It is hard to make 100% on a stock. The stocks where we have done so have usually been gold and silver. But this particular oil stock has been absolutely great from the standpoint of those who got in on the ground floor. There was some profit taking because it made so much money in a short period of time regarding the news on that first well. But the second well is starting up and I am fairly positive it will do well. You can buy the shares and hold the stock, although with some of these juniors, you are probably better off if you do not. It does have risk. It is a junior exploring company and its future is based on oil discovery, but now it is in a position where it has five more wells on the schedule. It is generating cash flow and preparing to drill another one. And, it has five major permits right now with multiple wells planned for 2012. I would say the chances are fairly good for another well to come in and then the stock would go higher.

A good junior oil explorer is hard to find because they are quite risky. We had one about six years ago with good managers and a lot of cash—a well in Wyoming, I believe. It was straddling a land position between two big wells that were operating—one with Exxon and one with Marathon Oil Corp. (MRO: NYSE). They were operating 50 miles apart and this one was right in the middle. It looked good and the stock was about $2.50 when we recommended a buy. The promotion was heavy on it and even though it had not really hit a well, the stock went almost to $7. My concern was if it came up dry, the stock would make a big reverse. So I walked people up using risk exit points and we got all the way to $6 and change. Then an announcement came that they were going to delay drilling. I told people to sell it. For some reason, they never drilled the well and the price went all the way back. But, my people were in from $2.50 to more than $6 based on a strategy that I devised to protect their position. I told everybody, "If the well comes in, you can buy it again at about $7.50 on the charts." But we elected to get out at $6.50.

TER: Any parting thoughts in the energy space as far as what retail investors should expect for this year?

RW: Natural gas is going to be flat. I would leave that one alone. The most opportunity for junior stocks is in the explorers. We can trade call options based on inflation and share prices rising in some of the seniors. That would really pretty much cover the yard as far as opportunity this year. Also, there is this Iranian question that is wide open. I do not think the Straits of Hormuz will be blocked, but the threats do so create a premium of $5–10 in the oil price. I think that premium pretty much went away as things calmed down, but it still could be as high as $5 and move up to $10. That premium is above the fundamental value of the shares themselves. I think inflation in the U.S. right now is running at 11.5%. They claim it is almost nonexistent, but that is not true. If you want to see good inflation numbers, look in the little box where they report in the Wall Street Journal commodities over a one year span and today's prices. The differences are very dramatic.

Roger Wiegand is the editor of Trader Tracks, a newsletter based in Maspeth, N.Y. that provides investors with short-term buy-and-sell recommendations and commentary on political and economic factors that are driving the market. He can be reached at or Contact Linda Gorman at Resource Consultants for information on Roger Wiegand's Technical & Fundamental Trading Class in Tempe, Arizona on April 26, 2012. Wiegand is also speaking at the annual Wealth Conference at the same location April 27–28 along with five other nationally known speakers. Call Linda Gorman at 800-494-4149 or 480-820-5877 for information and registration.

Want to read more exclusive Energy Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.

1) Brian Sylvester of The Energy Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Energy Report: New Zealand Energy Corp. Streetwise Reports does not accept stock in exchange for services.
3) Roger Wiegand: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for this interview. As reported above, Roger Wiegand does not personally trade any shares but trades futures and commodities for his own account. His personal trades are posted in Trader Tracks Newsletter available by subscription. Contact Claudio Basis, 718-457-1426 to sign-up.

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