Short term movements in energy markets are very much tied to supply and demand. Seasonal variations in the dynamics for crude oil and natural gas can allow for some very successful trading in these areas. With crude oil prices sitting around record highs of $79 per barrel, and the summer driving season winding down, it might be prudent to take some chips off the table if you purchased shares of the United States Oil Fund (USO) as I suggested back in January when the crude oil ETF was down 40% from its high.
Since then shares of USO have risen more than 35% to $59.43. This is not to say that I would get off of the energy train for good. But if you have an elevated exposure to crude oil specifically, maybe take some profits. Oil prices could go up further if we get any strong hurricanes in the next month or two, but the seasonal oil play is nearing an end, so lower prices would not be surprising as we head into the winter.
Rather than move out of energy completely, moving some crude oil funds into natural gas would be a good value alternative given that natural gas prices are depressed right now. Winter heating season is coming soon, so there will be more potential catalysts for that commodity in coming months. Natural gas plays would include the previously recommended United States Natural Gas Fund ETF (UNG), Chesapeake Energy (CHK), as well as Select List pick Gastar Exploration (GST).
You may have noticed that Warren Buffett is trimming his position in PetroChina (PTR), the large Chinese oil producer. I doubt these actions are being made on a short term trading prediction (Buffett is the epitome of a long term investor), but it reinforces the need to buy low and sell high to maximize returns.
Crude oil is on a roll right now, and that fact makes it hard for some people to not want to keep riding the wave, but selling into strength is a crucial strategy for those looking to maximize long term investment returns. Buffett’s purchase of PTR as a play on both China and crude oil, before those two areas were popular investments, should go down as one of his best investments in recent history. And yet, he isn’t being shy about taking some profits.
Full Disclosure: Long shares of CHK, GST, and UNG at the time of writing