# Shorting oil



## willow1044 (Jan 30, 2012)

So I believe that oil is never coming back the way it was several years ago. With that as the premise how would one go about shorting oil without actually shorting individual stocks?

For example I could keep all my $ outside of Canada with the expectation that the decline in oil will hurt CDN returns. I'd invest somewhere else such as the US which should benefit from lower energy costs.


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## james4beach (Nov 15, 2012)

Can you be more specific on the bet you want to make? I don't know what "never coming back" means.

Do you mean you want to speculate on the price of WTI ? Or brent crude? Priced in CAD or USD?

Do you mean the price won't rise much from its current level, or do you mean it won't get as high as its previous peaks?

All of these are very different things


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## fatcat (Nov 11, 2009)

willow1044 said:


> So I believe that oil is never coming back the way it was several years ago. With that as the premise how would one go about shorting oil without actually shorting individual stocks?
> 
> For example I could keep all my $ outside of Canada with the expectation that the decline in oil will hurt CDN returns. I'd invest somewhere else such as the US which should benefit from lower energy costs.


perhaps ... if you need to ask the question "how do i short a commodity", you might step back and question the assumption that underlies the question

i.e. if you don't know how to short a commodity, them maybe you really don't know enough about the commodity itself to make such a high risk investment


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## My Own Advisor (Sep 24, 2012)

People thought the same about CDN and U.S. banks after the 2008-2009 crisis. I can't tell you how many times I heard "things will never be the same".

Blah blah 

I suppose they were right to some degree, they couldn't foresee the all-time market highs in the years that followed!


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## KaeJS (Sep 28, 2010)

Wow.

This is a bad idea.

You do realize why oil is a commodity, right? It is limited, used globally and not renewable. To short oil is unwise.


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## atrp2biz (Sep 22, 2010)

To answer the OP's question, HOD is an oil bear ETF. But these kinds of ETFs are not long term holds as well documented in a number of threads due to their daily resets.


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## zylon (Oct 27, 2010)

I don't see anything wrong with o/p asking the question about how to short oil. Isn't that what this forum is about? Or am I not supposed to ask? How is a person supposed to learn if s/he isn't allowed to ask questions?

However, when it comes to shorting oil ... I would NOT short anything that has already dropped 50%, but maybe that's just me.


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## lonewolf (Jun 12, 2012)

put options on the USO


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## canucked_up (Feb 23, 2014)

willow1044 said:


> So I believe that oil is never coming back the way it was several years ago. With that as the premise how would one go about shorting oil without actually shorting individual stocks?
> 
> For example I could keep all my $ outside of Canada with the *expectation that the decline in oil* will hurt CDN returns.


Hasn't oil already declined? Seems to me in your example, you are kind of betting against 'buy low, sell high' too. Your use of "all my $" kind of makes me wince as well.



> *I'd invest somewhere else such as the US which should benefit from lower energy costs*.


This does make some sense to me, but... How much? How long? Buying high? I wish I knew. I recently made some broad index purchases on both sides of the border and a few smallish narrower focused purchases on this side(trying to catch some 'buy low'), and I'm comfortable with what I've done. I guess if we want bet on our predictions, we need to be prepared to be totally wrong. My bets are big/small enough for me. 
If you want to bet against oil in a general sense, I guess your approach to avoid Canada achieves that somewhat.


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## Pluto (Sep 12, 2013)

Yeah, you can buy put options on some oil etf. But I think you will get creamed. I suspect your pessimism on oil is approximating a bottom in oil. It isn't clear why you would have such a premise so soon after a significant crash in oil.


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## CalgaryPotato (Mar 7, 2015)

Didn't the OP clearly say that he does not want to short oil? He just wants his money optimized based on oil not necessarily dropping but not fully recovering.

Maybe he didn't make it very clear, but it is an interesting question, if you believe oil will stay around the price it is now, how do you capitalize or at least not get burned by that fact.

I'm thinking shorting Alberta real estate somehow would be a good bet.


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## PatInTheHat (May 7, 2012)

CalgaryPotato said:


> Didn't the OP clearly say that he does not want to short oil? He just wants his money optimized based on oil not necessarily dropping but not fully recovering.
> 
> Maybe he didn't make it very clear, but it is an interesting question, if you believe oil will stay around the price it is now, how do you capitalize or at least not get burned by that fact.
> 
> I'm thinking shorting Alberta real estate somehow would be a good bet.


Definitely not the time to go short oil as the risk reward is not longer there on a long term horizon. Way late to the party. Short term there are definitely good trades here.

If OP believes oil will not recover the above poster is on the right track. Almost any alberta weighted consumer based company is what I would be looking at. Although most of these have already priced in massive downside moves such as ACQ.TO.

Alternatively going long USD will act as a short against oil as well.


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## willow1044 (Jan 30, 2012)

After reading the replies I should clarify a few things.

I'm NOT betting on a continued sharp decline in the price of oil, I believe that the price will move sideways or slowly decline losing value in real terms. Essentially the easy money to be made from a decline in oil prices has probably already been made. 

To me the question is now: how do I go about continuing to benefit from a prolonged period of low prices since so many people believe that oil will bounce back?

I like the idea of betting against alberta real estate (waiting for the crash and then buying in cheap?). I'm already long USD having bought at $0.9828 and looking to sell sometime this month.


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## willow1044 (Jan 30, 2012)

OK, here's an example of what I mean (trading on a commodity without dealing directly in the commodity itself), except that it's going long instead of short.

When the price of oil dropped, those industries (such as airlines) that have a large part of their expenses in fuel should benefit. Therefore it would have been a good idea to buy Westjet, for example, which is in fact up 20% from the time oil started to decline.


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## willow1044 (Jan 30, 2012)

Maybe it's too late for oil and I'll have to move onto something else. But if it doesn't come back in price what happens to Russia, Venezuala, Nigeria, Alberta, Newfoundland, energy ETFs?

And instead of going short, what about going long? There's actually an association of energy intensive industries called appropriately: AEII. Cement for example is highly energy intensive and if energy is going to become cheaper maybe buying some of these could be a good idea: http://www.globalcement.com/magazine/articles/741-top-20-global-cement-companies


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## humble_pie (Jun 7, 2009)

willow1044 said:


> OK, here's an example of what I mean (trading on a commodity without dealing directly in the commodity itself), except that it's going long instead of short.
> 
> When the price of oil dropped, those industries (such as airlines) that have a large part of their expenses in fuel should benefit. Therefore it would have been a good idea to buy Westjet, for example, which is in fact up 20% from the time oil started to decline.



for decades investors large & small have pair traded oil & airlines, swinging from one to the other, it's a very well-known strategy. I should have tried it myself, except i don't like airlines.


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## KaeJS (Sep 28, 2010)

humble_pie said:


> I should have tried it myself, except i don't like airlines.


Just when I was beginning to think we would never agree on anything... :biggrin:


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## willow1044 (Jan 30, 2012)

Any other ideas on pair-trading oil?

Also what about HEE? It's taken an ~30% hit since 2014 so now might be a buying opportunity. Also it has a 12% trailing yield.

Horizon Energy Income EFT


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## zylon (Oct 27, 2010)

willow1044 said:


> Also what about HEE? It's taken an ~30% hit since 2014 so now might be a buying opportunity. Also it has a 12% trailing yield.


I pulled up a quick comparison of HEE to the top five holdings.
This compares share price only; doesn't include dividends/distributions.
Surely, there's a better way than HEE?

To play around with other time frames or tickers, here's the url.
http://stockcharts.com/freecharts/perf.php?HEE.TO,enb.to,pey.to,tou.to,su.to,imo.to


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## willow1044 (Jan 30, 2012)

zylon said:


> Surely, there's a better way than HEE?


But isn't buying low and selling high the point? So if the fund is worth less than it's underlying holdings then doesn't that tell us that it's under priced?


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## james4beach (Nov 15, 2012)

The OP should be careful about currency exposure too as oil against CAD is probably more important than oil against USD.

And as I mentioned earlier there's the question of *which* oil price you care about. West Texas? Brent?

Additionally, I don't know whether the intention is some kind of hedge against something but you should also consider how much of our existing lives are already impacted by oil prices. Plummeting oil prices reduce not only transportation costs, but also food costs, other manufacturing costs, etc.


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## Hawkdog (Oct 26, 2012)

willow1044 said:


> After reading the replies I should clarify a few things.
> 
> I'm NOT betting on a continued sharp decline in the price of oil, I believe that the price will move sideways or slowly decline losing value in real terms. Essentially the easy money to be made from a decline in oil prices has probably already been made.
> 
> ...



picking up oil stocks that have low debt, good assets and have at least 1/3 of their oil hedged above 80 bucks/barrel for 2015 is where I would start.
If you are looking to shy away from oil stocks for moral reasons and want to bet on renewables - copper stocks - renewables need lots and lots of copper. 

CHINA:Sales of passenger vehicles in world's largest auto market rose 9.4 per cent to 1.87 million last month,from 6.4 per cent in February
China's apparent oil demand in the first two months of this year rose 2.6% year on year to 83.92 million mt, or an average *10.43 million b/d*


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## james4beach (Nov 15, 2012)

willow1044 said:


> To me the question is now: how do I go about continuing to benefit from a prolonged period of low prices since so many people believe that oil will bounce back?


Just by living in North America. Oil heavily impacts all of our expenses, so if oil prices stay low, you're already benefitting.

If you feel like taking a more explicit position, you might bet that XEG (the oil sector) will under-perform the XIU (the TSX). You can do this by simultaneously going long XIU and short XEG... a pair trade.

If they both rise at the same pace, you are net 0. If they both crash the same amount, you are net 0. However if XEG under-performs XIU, you are net positive. On the flip side, if XEG out-performs the XIU, then you are net negative and lose money.


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## james4beach (Nov 15, 2012)

How interesting to look back at some of these threads. Here's willow1044 on April 1, 2015, who successfully called the biggest theme of the year: short oil

Right idea, right timing. Then we really poo-pooed his idea, as if it was a really bad idea.



> If you feel like taking a more explicit position, you might bet that XEG (the oil sector) will under-perform the XIU (the TSX). You can do this by simultaneously going long XIU and short XEG... a pair trade.


I wish I did that (hindsight is 20/20). Graph of XIU/XEG which shows the pair's performance
http://stockcharts.com/h-sc/ui?s=XIU.TO:XEG.TO&p=D&yr=3&mn=0&dy=0&id=p30690452135

In general, I like the pair trade technique between sector ETFs and XIU.


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## willow1044 (Jan 30, 2012)

Yeah, that worked out pretty well. I bought German companies in Euros, Canadian reits with US exposure, ishares USD div etf HDV and iShares TSX listed US div etf XHU. I'm up 7% and the TSX XIU is down about 15% for a net difference of 22% if I had just left my money in Canada. This is actually pretty good considering that we've had the worst start to a trading year ever. 

I'm a little under water on my Euro trade but that's a long term bet on the EU breaking up so no rush to judgement yet. 

I'm going to hang on thru the end of 2016 before deciding to harvest gains or not. I don't think oil's going to get significantly better until at least next year.


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## willow1044 (Jan 30, 2012)

So the question I have now is where to go from here? I believe that things are going to continue to get worse in the oil patch for 2016 as price hedges start to come off. Not planning on making any changes until then, but then what?

Sell everything and buy back into CAD and energy and try to ride the wave back up? I'm just not convinced that carbon fuels are really going to come back in the way that we are used to. Here is a good article on how we've overcome one of the last hurdles to widespread renewable energy.

http://thinkprogress.org/climate/2016/02/01/3743082/renewables-revolution/

If that's the case, and I'm leaning that way, then the CAD should stay low for a long time and it'd be best to stay in USD if one is already there.


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## tygrus (Mar 13, 2012)

Just like whale oil and horse and buggy and chimney sweeps, change can occur very quickly. 

Oil will be around but I doubt it will be ubiquitous as before. There are just too many obstacles aligned against it and too many govts committed to reducing it influence. Canada will be lucky to be a few million bbl/d producer but the dreams of 5-8 million bbls coming out of the sands are done like dinner.

Energy Storage Taking Off

btw good call willow. You are fearless.


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## Rusty O'Toole (Feb 1, 2012)

Not ragging on the OP but when newbies ask how to short oil it is a sure sign it is time to start buying oil stocks. As others have pointed out the big money on being short oil has already been made. How low do you think it will go? It can't go to zero. Look around, everyone still needs oil and the present glut will get soaked up eventually. When that happens oil will take off upward with no warning and the shorts will get killed.

It may not be this year or even next year but the big trade will be to get long oil not short. Seriously, if you said you were getting set to start accumulating oil stocks I would say you were a hell of a smart investor no kidding.


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## lonewolf (Jun 12, 2012)

Standing on sidelines sometime in next 7 years looking to go long oil in single digits. If I miss no problem


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## dogcom (May 23, 2009)

Rusty O'Toole said:


> Not ragging on the OP but when newbies ask how to short oil it is a sure sign it is time to start buying oil stocks. As others have pointed out the big money on being short oil has already been made. How low do you think it will go? It can't go to zero. Look around, everyone still needs oil and the present glut will get soaked up eventually. When that happens oil will take off upward with no warning and the shorts will get killed.
> 
> It may not be this year or even next year but the big trade will be to get long oil not short. Seriously, if you said you were getting set to start accumulating oil stocks I would say you were a hell of a smart investor no kidding.



You can actually get killed shorting in a bear market because the biggest and best rallies occur during bear markets.


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## Chris L (Nov 16, 2011)

Okay, shorting oil right now would be pretty stupid (no offense).

The likelihood of it going someplace between $30 and $0 is far less than it going between $30-$200. Don't short oil. The recent rally is probably due to covering shorts. Play the upside in oil or don't bother. IMO


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## tygrus (Mar 13, 2012)

I've got some producers as part of a larger fund but there is no way I would go all in on oil right now, either short or long.


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## lonewolf (Jun 12, 2012)

Oil preferred Elliott wave count from 08 high tracing out an ABC decline

Wave A was 75.89% decline from the 08 high. Wave C low so far 75.13% decline from the B wave high. Often wave A = Wave C or wave A can be a fib ratio of wave C. Since wave A & wave C percentage decline is so close to being equal would not want to short here. Wave C still looks like it could still subdivide lower.


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