Investment Opportunity In Crude Oil Price Crash

Hottest topic in the town ...

Crude oil? Shale oil Boom? Russian conspiracy? Oversupply?
For whatever reason it is, the falling of crude oil price from ~$100 to ~$60 has sent shock wave to worldwide financial market and as a result, index especially KLCI (Malaysia) retracted as much as 200 points.

However this is not the end of the world, the sharp dip of oil price creates opportunity for individual who holds high % of cash in his/her portfolio or with plenty of Greenback (USD) to buy cheap. I personally believe the rebound of KLCI is pretty much depends on the performance of oil price. 


What is this all about ...
Today I am going to introduce a class of investment vehicle called 'Exchange Traded Note' or simply as 'ETN'.

According to Investopedia, ETN is : 

'A type of unsecured, unsubordinated debt security that combines both the aspects of bonds and exchange traded funds(ETF). ETNs returns are based upon the performance of a market index minus applicable fees, no period coupon payments are distributed and no principal protections exists. ETN are traded on a major exchange, such as the NYSE during normal trading hours.'

Don't get too worry if the explanation confuse you a lot, ETN basically tracks the performance of predefined index, for instance WTI Oil Price and can be traded just as the normal stock in exchange. But be warned that ETN has no capital protection and investors might not getting a single cent back during the maturity date.

The ETN of interest today is 'VelocityShares 3X Long Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return' =.=|| or simply as 'UWTI'. In general it tracks the performance of WTI/Brent Oil price. 


More explanation ...
The value of UWTI is proportional to crude oil price as shown from chart below, the respond function for UWTI vs Crude Oil price is polynomial (sorry I am an engineer =P) 

Some simple math using the quadratic formula ... As of now the Crude oil price is around ~$55 ...

There are some unofficial research pointing to the break even cost of crude oil is around ~$45, seen as a strong support point for oil producers to avoid making loss in daily operations. 

Some high cost producers might start to cut back production, reduce capital expenditure and there might be consolidation among smaller oil producers. Eventually supply and demand will back to normal after the ugly price war and oil is expect to stabilize around ~$80 as soon as next year.

So ... if you pay attention to the table as shown above, downside risk is limited and shall oil price rebound, 100% gain can be achieved easily ... 

UWTI Change/Crude Oil Change :-
Downside Risk (Crude Oil < $55) : $0.26 per dollar
Upside Potential (Crude Oil > $55) : $0.44 per dollar

Upside potential is almost 1.7X if compared to downside risk

At your own risk of course ... =)