How to Profit from Low Oil Prices

Crude oil prices have reached four year lows. The last time crude oil was lower than it is now was in February 2009 at $43.35/barrel. By April 2011, the prices shot back up to $100/barrel. At it's current price, crude oil is hovering around $50-$55 per barrel.

Just a few months ago, crude oil was selling at $100 per barrel. How is it that companies and countries can still make money selling oil at these prices? To understand this we need to understand how much it cost to produce a barrel of crude.

Scotiabank Equity Research and Scotiabank Economics published a report in late November 2014 comparing the costs of cumulative crude oil production. At the low end Saudi Arabia is able to produce a barrel for $10-$25 USD. Whereas new infrastructure mining projects can cost upwards of $90/barrel. On average, most crude oil projects cost about $45-$60 to produce a barrel. These estimates exclude up front costs such as land acquisition and infrastructure costs. Therefore, the prices might even be higher. At these prices, most projects will lose money. Saudi Arabia is the only one that can withstand such low prices.

The easiest way to do this is to buy exchange-traded funds more specifically the Proshares Ultra DJ-UBS Crude Oil ("UCO").

Now it doesn't make sense to go out there an buy a a couple hundred of barrels of crude oil and then hoard it in your garage until the price goes up. The easier way is to trade derivatives. In other words, financial instruments that will track the price of crude oil, but are liquid enough to be traded in the open market. The easiest way to do this is to buy exchange-traded funds more specifically the Proshares Ultra DJ-UBS Crude Oil ("UCO").

Technically speaking, crude oil prices have bounced from the low in early February. For the time being prices seem to have broken the downward spiraling trend. Whether or not this continues is dependent on whether or not it is able to hold its 20 day moving average ("DMA") and also climb over the 50 DMA. Whereby the 50 DMA has served as strong resistance back in late September/early October.

A possible entry point could have been a pullback to the 20 DMA with a stop just under it. Alternatively if you want to be in the trade longer, a stop at the Feb low would also be adequate. While the stochastic indicators (STO) leave something to be desired, the STO don't seem to have a good correlation on prices at the moment. Typically, you'd want to buy when the STO level are oversold in 20 and sell overbought in 80. 

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