There are very few people out there that can seem to justify the near $100 price tag on crude oil. The fundamentals based on supply and demand support levels much lower than $100, leading one to believe that the additional premium on black tea is built on speculation, which tends to be the most volatile trait of a commodity.

So one has to wonder, is it time to short crude?

The next question you might ask, is if so, how? The traditional way to trade oil is through a futures account, which tends to be an expensive endeavor just to set up an account that handles futures. Shorting any of the futures tends to be expensive, and carries perhaps more risk than shorting an individual stock.

There are some options out there for the individual stock investor. There are several exchange traded funds that track oil, five of them in all, and in theory at least, they could be shorted as any stock could. However, four of these funds are thinly traded, meaning it may be tough to borrow the shares to sell.

There are a couple funds out there that track the upside, and downside of crude. If you’re going against the upside, the best bet is the MacroShares Oil Down Tradeable Trust (DCR: chart, web, Y!) which tracks the inverse performance of the long-term trend for oil.

On the other hand the MacroShares Oil Up Tradeable Trust (UCR: chart, web, Y!) is the long version.

The two funds work like swaps in that when the Up Trust increases in value, it takes the money from the Down Trust.

Unfortunately, the Up Trust and the Down Trust aren’t the hedges they might be because their share prices tend to trade out of line with their net asset value. As of Monday’s close, the Down Trust was trading at a 73% premium to its NAV, while Up Trust was trading at a 20% discount to NAV.

If anything, the fact that the down trust is trading at a significant premium and the up trust is trading at a discount gives you an idea of where investors see the price of crude heading. Down!

Consequently, if you have a bearish view on crude, you might be better of shorting the upside trust rather than going long the downside trust.

Anyway, just an idea if you see crude oil as an overprice commodity. Keep in mind, though, that crude trades on a global market, so decreasing demand in petroleum products in the United States does not guarantee a decrease in crude prices.

My take

I think we’re due for a correction in the crude market. The commodity has doubled this year and we have yet to see a healthy pull back. I think oil could drop to $80 per barrel, and based on our short term memory, consumers would see this as a fire sale at the pump. Long term, I think we’re looking at $100 oil, but I also think we’re seeing a good opportunity to short it near term.

What do you think?

Tags: commodities | crude oil | Energy | futures | markets | short crude

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