16 January 2007

Cheap Oil

Oil prices are down about 4% today, with both NYMEX crude and Cushing spot prices below $51.00 per barrel.


Oroborous said...

NYMEX Crude Oil (Light) futures for '08 are averaging $ 57.50, those for '09 are $ 58 & change, for '10 they're $ 59, and for Dec. '11 & Dec. '12, they're $ 60.

The '10 - '12 prices seem cheap to me. I'd be willing to bet that oil prices spike above $ 70/bbl sometime in the next 70 months.

joe shropshire said...

Say you are right, and the price hits $70 before January 2012. That's a minimum 7.5% nominal return annually (70 - 51)/51*5 if you buy now and if you sell off right at the peak. Surely there's a way to earn that sort of money with less risk? My plain vanilla bond fund was up 9% last year.

David said...

The five year treasury is in the high 4's, so you can get almost 2/3's the return for none of the risk.

Oroborous said...

Except that futures contracts are highly leveraged, which is what makes them attractive, and scary.
For crude oil futures contracts, one typically deposits an initial margin of 5% - 7% of the value of the contract.

So, if the price were to go up 17% per barrel, one could realize a gain of around 300%.

M Ali said...

I don't own any bonds. For the long-term return they bring you may as well hold cash.