The best solution for low oil prices – is low oil prices!
Oil was very weak in the first half of 2020. It slowly rose to $45 in late December. As economic indicators slowly inched up the Dallas Fed conducted its Q3 Energy Survey.
The survey asked 166 energy firm executives where oil prices will be going forward in the next six months. The average price from the survey was $43.27 per barrel by year-end 2020, and by Dec 31st it was at $48. As of Mar 1st, oil has risen to $60.
On Mar 5th, OPEC+ surprised analysts by announcing that it would continue restricting oil production. Oil futures shot up after the announcement.
This could mean higher prices going into the near future. You can take advantage of this continued rise by selling puts on the USO ETF.
USO has risen steadily from $40 on Mar 2nd to $44 on Mar 5th up 11% in the three-day period. There is still some upside potential for the ETF going into Q2 of 2021.
Profit from continued strength
By selling puts, you will profit when the price of an underlying stock or ETF goes up or even sideways. You could also see profits if you buy a call.
However, if there are circumstances that change the market during that time and prices retrace, then you would lose most, if not all of your investment.
By selling a put, if there is a brief decline, the shares will be put to you, but you won’t lose your entire investment. The shares still have value, and you can sell a call against them to protect you from further downside risk or earn profit with a return to the upside.
The downside likelihood, in the short-term, doesn’t have a high probability due to the cuts OPEC+ has implemented.
But U.S. oil companies will start to activate those wells that were shut down during the pandemic-induced decrease in 2020. U.S. oil companies need about $50 price point to be profitable. It will take weeks or months for those wells to come back online.
Additionally, the cancelation of the Keystone pipeline will have a major impact on the price.
Oil will have to be shipped by truck or railcar limiting the quantity to be moved and increasing the transportation costs. Because of this, food and other goods will also increase because of the price of oil.
The demand for railcars and trucks will surge thereby increasing the cost of those goods.
So, for the near future, oil prices should rise until the supply has increased enough to meet demand. Selling puts is an excellent way to profit from the situation.