The price of oil has been plummeting. The idea is that many oil extraction investments have been built using borrowed money. In order to pay off the interest on this borrowed money, oil must be sold regardless of how cheap oil has become.
Yesterday I watched as oil prices went up about 8% as there was a rebound. I was tempted to buy oil ETFs (ASX:OOO) with my margin loan account, but I eventually decided not to. I am on the fence about buying oil ETFs at this time.
The reason why I am entertaining the thought of buying oil ETFs is that I believe that what goes down must go up. Oil cannot stay cheap forever, and it cannot go down to zero. The further it goes down, the gains you can make when it goes up will be much greater because you’re rebounding from a lower base.
“The best time to buy is when there is blood on the streets”
I am often a very inconsistent investor. I have moments when I’m very bullish and I want to buy oil ETFs or leveraged ETFs, but there are also moments when I am very bearish as well. In fact, about five or six years ago I was quite bullish. I pumped money into shares. Thankfully my intuition was correct and the market did go up. However, now I am starting to get bearish, and I am thinking about buying government bonds.
While I often have moments of extreme bullishness and extreme bearishness, I tend to buy and hold rather than sell. I buy many risky investments when I feel confidence and I buy many defensive investments when I am fearful, and because I rarely sell anything, my overall portfolio is quite moderate and somewhat resembles most balanced funds.
Buying oil ETFs won’t make you much in dividends or passive income, but because oil has been falling so much, my belief is that buying massive amounts of oil ETFs at a time of crisis can result in massive returns. History shows that those who buy during crises can make a killing. Oil is simply too important for our global economy. It is used in just about everything. It is therefore highly unlikely demand for oil would suddenly drop. I predict a period of deleveraging soon, and after there has been sufficient deleveraging, we will enter a phase of leverage again when investors take on more debt and start pumping money into assets such as oil. Oil may go down further, but I am confident that with patience it will go back up again. That’s just my opinion.