Top Ten Tips for Trading Crude Oil Futures

Submitted By John Bougearel

March 11 2008
John Bougearel

My response to a a reader's inquiry on my most recent crude oil post on Wile E. Coyote's Gravity Lesson has evolved into a top ten list. Well, almost top ten. The transcription is as follows:

Hi John,
I am trying to understand your site and would like to know where the actual tips are located. For example I am trying to understand whether to go short or long for Crude Oil NYMEX at this time.

N,
Thank you for your questions.

First, let me point out that the actual “trading tips” is not intended as a trade recommendation service. In other words, I do not say go long $5 “Rocketfuel” and go short $5 on “Plodder”. As webmaster of SuccessfulTradingTips.com I promise to deliver relevant market insights to my reading community. Some of these market insights will be actionable from time to time, some will not. The tip sheets at the horse track never tells you which horse to bet on, and neither does SuccessfulTradingTips.com.
Racetrack Tip Sheets do however provide relevant insights to BDH’s (Broken Down Horseplayer’s) making various horse bets on all the various races.
A market insight’s relevance is not determined by whether it is actionable or not. Perhaps, somewhere down the road, when I have over 1,000 email subscribers, if the community wishes additional educational content, we can consider new things. But with only 50 email subscribers to SuccessfulTradingTips.com’s blog, there isn’t enough demand to do anything more than just what I am doing at this juncture.
To answer your specific query about crude oil, let me say the following. First, Crude oil is in a secular long term bull market, which means that it can climb to $300 by 2025 if it wants to. There is no ceiling on crude oil prices, it is a depletable resource, and demand for this depleting asset only grows larger every day. The sky is the only limit. In that sense, Crude oil can be likened to Jack’s Beanstalk. It’s magical.
Many inputs influence the ebb and flow of crude oil prices over a shorter term horizon however. For example, crude oil has been behaving as a hedge against the eroding purchasing value of a dollar. Therefore, whether you are long or short crude oil today is a function of the direction of the US dollar. If an event happens to restore confidence in the US dollar, the need to hedge the dollar becomes null and void, at which point, aggressive hedges against the dollar will be lifted. Today’s $200 billion injection of liquidity into the US financial system should restore some confidence in the dollar. This consideration is a bullish input for the dollar and a bearish input for crude oil near term. Will that consideration cause the dollar to rise and crude oil to fall over the near term following today? Possibly it will. And therein is your “tip” per se. But there is no trade rec. Nor will there ever be a trade rec.
Each investor’s risks tolerances are hugely different, and a trade rec from me would be worthless for everyone except for the lemmings of this world. But, as a general risk management rule, “entries are a function of your exit strategy” - Period (see Mark Douglas’s book for more on this point) – whether you enter long or short. No trade rec advisory can determine your risk tolerances and your exit strategies.
Don’t bet on trade recs advisory services. Determine your own exit and entry strategies that you can live with. Be your own BDH.
All consumers of crude oil products have positions in Crude oil. You just need to understand/determine whether you are consumer of crude oil products or not. If you consume crude oil products, you are short already if you are not long crude oil futures. If you never hedge your consumption by going long crude oil futures, you risk being short crude oil for the duration of your lifespan.
As a consumer of crude oil products, if you do not own any crude oil positions right now, then you are already short the crude oil market. If you are short, and crude oil prices move lower in response to this short term Fed stimulus, then that will work to your short term advantage. If you are short and prices move higher, then you need to consider risk management strategies to hedge against the secular force of rising crude oil prices.