I purchased 50 shares of USL (US 12 month oil futures) today, at $35.10 per share. USL is an exchange traded fund that mimics the price of oil. Generally speaking, if oil prices rise, USL will also rise.
Reasonably thinking, oil has been on a slide this month, falling from nearly $90 per barrel to under $70 per barrel. As for safe havens, oil has decoupled from gold over the past month. This is mainly attributable eurozone fears and perhaps decreasing Chinese demand for commodities. In fact, many of the metals (copper, nickel, etc.) have fallen along with oil this month, yet gold has managed to hold its own. Additional worries and decreased consumption could easily push oil (and metals) lower. This is the risk I’m bearing in this trade. (Side note: exiting my copper position in March turned out to be a shrewd manuever).
Gold decouples from Oil in May
(image from Google Finance)
Metals fall with Oil in May, Gold remains steady
(image from Google Finance)
My first thesis to this trade is that I still believe geopolitical tensions in the Middle East (Israel-Iran) could cause a supply shock in oil, sending prices higher. A second idea is that the Deepwater Horizon spill in the Gulf could prompt congress to pass restrictive legislation onto the oil industry; discussion plans for new wells have already been scrapped since the incident. A final argument is that I would rather own something tangible rather than a currency right now; it may be easy to argue against the euro, but other currencies are similarly susceptible to declines.
As for my portfolio, this will increase my allocation to commodities, which was previously below my goal of 10%. My portfolio allocation goals can be seen at the conclusion of my 1Q10 Performance.
