Deutsche Bank announced late yesterday that they were pulling the plug on the PowerShares DB Crude Oil Double Long ETN (better known as DXO). Most ETFs and ETNs die out because they can’t attract enough investors. DXO seems to have suffered the opposite fate.

In the new clampdown on commodity speculators, it’s no huge surprise to see the world’s most popular double-long, leveraged ETN fold suddenly. Deutsche Bank didn’t specifically claim that the Commodity Futures Trading Commission put the kibosh on the DXO, but their press release did cite a “regulatory event” as the principal reason for the closure.

Set to close on Sept. 9, DXO is now hemorrhaging. We’re not sure which is worse for share prices: its imminent closure or that it’s double leveraged a commodity that’s currently plummeting.

Deutsche Bank has other popular commodity trading vehicles, like DBA (agriculture) and DBC (general commodities), that could suffer a similar fate. Both of those funds rely on a position limit exemption, which the CFTC revoked last month. Caveat emptor.

“Anytime the government intervenes like this in the financial markets, they destroy efficiency,” says Resource Trader Alert’s Alan Knuckman. “The action by the CFTC to limit position sizes will only make the problem worse by decreasing liquidity. Markets need more speculators — not less — to lessen the impact by any one entity. For example, the elimination of short selling in the financial stocks in the fall of 2008 caused more damage by dragging out the inevitable for companies that made disastrously poor decisions.

“The CFTC will force trading to move to the over the counter market, which lacks transparency, or to foreign exchanges. Volume and open interest could decline here in the United States and make transacting business more difficult and costly in the future. The present tight bid/ask spreads ensure smooth market entries and exits for all. Without the ability to execute a solid trading plan efficiently, the risks increase for all participants.

“With the current and effective monitoring rules, we know exactly who and how players are positioned. Under the proposed political pandering, that data will disappear from the public eye.”

Source: ETF Reckoning Day?

And the green shoots brigade gained a firmer hold on investor sentiment. It has become okay to say that the global economy is out of the woods and that the rally in US stocks could be the beginning of a new bull.

Is this optimism justifiable? This is the question we’ll attempt to answer in today’s Notes.

“The whole credit collapse and the recession must have been a hoax,” writes our favorite underground analyst David Rosenberg at Gluskin Sheff.

Rosie is talking about the latest Investors’ Intelligence survey. It shows bullish sentiment at 47.7% (versus 42.5% the week before) and bearish sentiment all the way down to 23.3% (from 25.3% the week before).

Meanwhile, net inflows into US equity funds have been positive now for 12 consecutive weeks, with a total of $2.83 in fresh capital pouring in the week before last. Another sign of exuberance, as Rosie points out, for contrarian investors.

Maybe the bulls haven’t been paying attention to the catastrophe in exports. This from Rosie’s Friday missive:

The latest data on China’s outbound shipments showed renewed hints of slowing. Same for Korea. German exports plunged 4.8% in April and are off 28.7% from a year ago. Canadian export volumes sank 5.1% in April — and this transcended the problems in the auto sector — on top of 2.3% slide in March, taking Canada into a deficit position of $178 million in what is a vivid sign of a hugely overvalued loonie. U.S. export volumes also dropped 4.3% in April after a 0.5% decline in March, taking the YoYo trend down to a new all-time low of -20.4% from -13.8% in March.

Maybe the bulls just don’t care. This has been our suspicion here at Notes since the current rally US stocks kicked off in March. Let us explain…

The credit crunch and the collapse of onetime Wall Street darling Lehman Brothers last September spooked investors bad. Fear spread over a 1930s style great deleveraging, and stocks plunged as a result.

But are we really experiencing a great deleveraging? The upsurge in US stocks signals that we’re not… as does the more recent rise in crude oil prices. A deleveraging is by nature deflationary. But the rise in base metals, stocks and oil reveal that traders and investors are counting on deflation’s nemesis – and the nemesis of earners and savers – inflation.

We’re learning the lessons of history not by studying it but by repeating it. Warns underground investor Bob Carver over at MarketClues.com:

When the Bankster Debt Bubble burst in 2007 and 2008, it was popular for most to think that a great period of de-leveraging had begun. This happened in the Thirties and led to the Great Depression. It wasn’t pretty, but debt was either written off or paid off. The country learned a big lesson about banksters and how their bad decisions blew up the economy. Once those who had learned those lessons were gone, we had to re-learn those lessons, not by studying history, but by repeating it.”

Or, have we learned the lessons? Today, we not only have not learned the lessons of the Bankster Bubble, we are repeating and expanding the bubble of debt. Instead of a Bankster Bubble, we have a Government Debt Bubble that subsumes the Bankster Bubble and expands it. There is no de-leveraging going on. We are simply blowing a bigger bubble, waiting for the day when our lenders cut off the flow of funds.

Total debt is still rising sharply, according to the Fed’s Flow of Funds Report. In 2008, Federal debt grew 24% and in the first quarter of 2009 grew by 22.6% at an annualized rate. Household and business debt was virtually unchanged, while state and local government debt is rising at a 4.9% annual rate in 2009. Don’t take our word for it. OptionARMaggedon did some charts which show that the debt bubble is still expanding. The last two years were simply a sneak preview of what’s coming when the, by then much larger, debt bubble blows up in the future. The longer this goes on, the worse it will be. The public is sitting idly by while this pile of explosives is being built higher and higher, just waiting for the day when someone with a match lights the fuse.

Put simply, the only way out of a debt induced depression is to pay down debt or write it off. Leveraging up only delays the inevitable.

Given this “leveraging up,” it should come as no surprise that oil prices have risen sharply recently. The black goo is now trading at over $70 a barrel, just off its nine-month high of $73.20. The rate of gain is astonishing: oil prices have risen 100% since their $38 low in January.

Underground investor David Fessler at Investment U recommends four ways to profit from oil’s price moves (three long and one short).

• 1. Certainly one of the big drillers like TransOcean  (NYSE: RIG) is a great long-term play on rising oil prices, as their shares closely mirror the rise and fall of the commodity itself. Shares of the drillers have been absolutely punished, and TransOcean is off nearly 50% from its 52-week high.
  2. The United States Oil Fund LP  (NYSE: USO) is an ETF designed to track West Texas Intermediate (light, sweet crude oil) prices. The fund invests in futures contracts for crude, heating oil, gasoline and other petroleum-based fuels.
  3. If you don’t mind some potential added volatility, PowerShares DB Crude Oil Double Long ETN  (NYSE: DXO) is a long-leveraged Exchange Traded Note available to investors. It’s designed to track the performance of certain crude oil futures contracts, plus the returns from investing in three-month Treasuries.
  4. But if you’re a bit more active in your trading, or if you feel oil is ready for a pullback, you might consider a short approach. PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) is designed to do just the opposite of DXO if you feel that our current rally in oil prices is overdone. For the reasons above, I don’t believe that’s the direction we’re going, but I think DTO is one of the better ways to play a short approach to oil.

Unfortunately – at a time when consumers can’t afford a wallet drain – retail gasoline prices across the United States have risen to $2.55 a gallon on average, and over $3.00 a gallon in places like California.

As you drive by the gas station and see the now familiar price changes – sometimes by the hour – you might wonder what’s really affecting the price you pay…

Investors, of course, want to know if there’s a good way to play the price moves. Let’s take a look at the two biggest drivers of oil prices and ways you can play its movements.

Oil Prices Rise As Production Costs Vary Widely

As with any natural resource we use, crude oil has costs associated with its production that are relatively clear, but nonetheless can vary widely.

Those variations come about almost entirely based on where the oil is. Since we’ve been using the black goo for nearly 100 years, it stands to reason that most of the easy, cheap oil deposits have already been found.

Taking a look at the costs to even find the stuff:

• You’ll find deep-water exploration is far more expensive than land-based exploration. You need a sizeable exploration vessel, capable of operating in some of the world’s angriest oceans for months at a time.It has to be equipped with highly sophisticated instrumentation and software to be able to “see” potential crude oil deposits as deep as seven miles below the surface of the ocean. You also need a crew of mechanics to keep it all working, and petroleum engineers and geologists to interpret the data.
• Land-based exploration – on the other hand – can be done from a well-equipped van, by one or two petroleum geologists.Then there’s production costs: land based oil is cheap to drill for. Land-based drills can fit on the back of a few tractor-trailers and can be torn down, moved and setup at a new location with relative ease. In addition, it’s much less expensive to extract.

Land based production is definitely preferred. Unfortunately it’s not where the big new finds are made.

As you go offshore into deep water, things get expensive fast: deep-water extraction is a financially losing proposition with prices anywhere below $75 to$80 a barrel, compared to as little as $25 to$30 a barrel for some land-based deposits.

But exploration isn’t the only cost of crude oil. Refining, transportation and taxes make up the remaining cost of what you pay at the pump. And that’s really just the start of what we pay for gas…

The Other Price Drivers: It’s Not Always What You Think

When crude oil prices spiked to $147 a barrel, there was no question that speculation played a significant role in getting it there. But speculation also played a role it getting it to $38 a barrel, too.

In the end, for oil and just about everything else, it all comes down to supply and demand. We’re in a recession, and demand continues to slacken. OPEC’s response has been to cut supply, with the thought that – everything else being equal – prices would eventually stabilize at some level.

But everything else isn’t equal: The Federal government has been dumping cash into the financial system at unprecedented levels. It’s caused the dollar to drop in value with respect to other world currencies and with respect to gold.

Since oil on all the world markets is priced in dollars, its price rises as the value of the dollar declines. It’s one of the reasons many oil-producing countries have suggested that the price of oil be tied to a basket of currencies instead of just to the dollar.

Unfortunately, there aren’t any other currencies that are as abundant or – more importantly – strong enough to handle the sheer volume of the transactions that occur daily in the oil market.

So we have demand and supply destruction in a race downward here in the United States that’s kept oil inventories high – up until a few weeks ago. Add to that steadily rising demand coming from emerging markets around the world. Throw a declining dollar into the mix and stir.

The result is rising oil prices – in all likelihood heading to $80 a barrel or possibly even higher by the end of the year.

Three Ways to Play the Pickup in Crude Oil Prices

As for investing in crude oil, here are three ways to get long in oil and one way to short it:

• Certainly one of the big drillers like TransOcean (NYSE: RIG) is a great long-term play on rising oil prices, as their shares closely mirror the rise and fall of the commodity itself. Shares of the drillers have been absolutely punished, and TransOcean is off nearly 50% from its 52-week high.
• The United States Oil Fund LP (NYSE: USO) is an ETF designed to track West Texas Intermediate (light, sweet crude oil) prices. The fund invests in futures contracts for crude, heating oil, gasoline and other petroleum-based fuels.
• If you don’t mind some potential added volatility, PowerShares DB Crude Oil Double Long ETN (NYSE: DXO) is a long-leveraged Exchange Traded Note available to investors. It’s designed to track the performance of certain crude oil futures contracts, plus the returns from investing in three-month Treasuries.
• But if you’re a bit more active in your trading, or if you feel oil is ready for a pullback, you might consider a short approach. PowerShares DB Crude Oil Double Short ETN (NYSE: DTO) is designed to do just the opposite of DXO if you feel that our current rally in oil prices is overdone.For the reasons above, I don’t believe that’s the direction we’re going, but I think DTO is one of the better ways to play a short approach to oil.

Any way you play it, you need to be aware that there are many factors that can affect oil’s price, and by extension, any investments you have that are tied to it. Keeping an eye on the biggest drivers of these prices will give you a leg up on the average investor.

Good investing,

David Fessler

Source: Rising Oil Prices: Here’s Four Ways to Play Crude Oil

Oil has gone from about $38 per barrel to around $58 per barrel in the last two months. The recommended plays from the last two articles have also run.

The two ETF’s I have recommended have performed exactly as advertised. Both, DXO and DIG have consistently returned at least twice the increase in the price of crude oil. Within days of the first recommendation you could have purchased DXO for as little as $2.71 per share, it’s now about $3.46.

The current price of crude, $58, and the expected price target of $75 per barrel would suggest another 60% gain is possible for both in the near term. At this point the move in the price of oil is almost unavoidable, for many reasons.

In just the past two weeks, two different OPEC spokesmen have stated that oil has to go to at least $75 per barrel, and production will either be cut, or would not increase when the world economy to expands, which amounts to a cut. This is reason enough for the excess oil reserves we have to dry up in a hurry.

With information like this on the street it is conceivable that if any really significant positive information about the health of our economy, or any other key world player’s economy, were to be released we could see a run well beyond our near term price of $75.

The U.S. economy is showing signs of improving. The most recent jobs numbers indicate we are on the right track for a healthy recovery.

The stock market’s recent move is indicative of it reacting to news six months into the future. Six months is about when most believe the economy should be moving into positive territory and the increases we have seen in oil prices are paralleling the upward moves in the market.

We are moving into the summer driving season and increased gasoline consumption. This too adds to the demands on our reserves and in recent years has driven the cost of gas up.

China’s economy is starting to rev up. 85% of their stimulus package was committed to infrastructure as compared to 5% of ours. This has had a more immediate affect on their numbers and it is showing in the rate of recovery.

As the economies of the world start to generate bigger and bigger numbers, the demand for energy will explode again. It’s doubtful we will see $146 per barrel again soon, but it will happen again.

The more immediate opportunity is in the next nine months. The price target of $75 is a forgone conclusion. How much higher it runs is a function not so much of consumption but of anticipated demand in response to how quickly the world economies recover.

So here again are the recommendations, with a new one.

DXO is a pure crude play that will give you two times the return of any increase in the price of crude.

DIG is a crude and natural gas play that also gives you two times the return of the price of crude and natural gas. It isn’t as clean a play as DXO but its return has outpaced DXO a little in the past few weeks.

The new play is a gasoline play, UGA. This is a pure play on the price of gasoline. It pays one to one for any price move on unleaded gasoline delivered to New York harbor traded on the New York Mercantile Exchange.

Gas in my area has moved from $1.99 to $2.29 in a week.

This is a move you must make now or get used to watching from the side lines. As the price moves into the sixties in the next few months, the total return on this play will have dropped to the point that it will have become a sucker play with the uninformed buying at the top.

This will not be a straight shot; you will have a few more opportunities on pull backs to average in and get your overall cost down. But make no mistake; oil is going back to the $75 to $100 range, and maybe higher. You have had plenty of opportunities to take advantage of it.

Source: Last Call for Oil

This from Steve:

It’s time to stop worrying about the bottom of this market and start taking advantage of the carnage the gross mismanagement of this country’s affairs has left us. Oil is a good place to start.

$40 Oil? Are you kidding me? This is what I call a slap in the face investment. It’s so obvious it’s hitting you in the nose.

This temporary worldwide slow down, and it is temporary, has pushed oil down to a point most people never thought they’d see again. After all the speculation driven price increases of the past few years, it is a nice break, but it won’t last long.

Oil at this price isn’t reasonable. Some of the price drop is the typical over reaction by investors because the run up to the $147 range was so over done. This sell off has created one of the greatest money making opportunities, ever.

The reality of the situation is that OPEC will only put up with these prices for so long. Forget about all the technical data, the opinions of the talking heads and supply/demand numbers, the price is going up.

The best guy I know in the business, a commodities analyst with a group in Chicago says oil should rise to at least $75 in 2009. One way or another OPEC will raise prices. They have to; they need the money.

The problem with not having an energy policy for the past 40 years is that we are wide open to the demands of energy exporters. If they decide they are going to raise the price of oil, they can. Whether it’s because of manipulation, production, consumption or nothing, it will go up. Just look back to 1974 to see how it can be done.

We are doing virtually nothing to reduce our dependence on imported oil, unless you consider this administration’s rhetoric as doing something.  The developing world will shortly resume its huge demand for oil and other commodities, and $75 a barrel will be cheap.

Rather than get caught again with your pants down at the gas pump, lets look at how to turn the tables and make money on this run up.

Investing in oil companies has never been my favorite way of making money on oil. They tend to be very diversified and their stock price rarely tracks oil’s price closely. I prefer two ETF’s.

The first one is the USO, not the serviceman’s group, but the United States Oil Fund. It is designed to track the price of oil, on a percentage basis, not point for point, but close.

It has been as high as $119 per share and as low as $24. It is currently within a few dollars of its low. You should expect close to, not exactly, but close to a point for point move on a percentage basis as the price of oil changes.

Over the next year a realistic gain expectation is about 80% to 100%. On the three to five year horizon, the sky is the limit.

Now here’s a play that will give you almost a two for one return on any increase in oil.

DXO- this is an exchange-traded note, not a fund, offered by Deutsche Bank. It is designed to give you twice the percentage return of oil. Keep in mind, if you have an investment that gives you twice on the upside, it will also take twice on the downside. Nothing is free!

Its 52-week range is around $1.75 to $29. It is only a few cents above its low. This is a potential 150% to 200% gain this year or early next.

Very rarely have I seen an opportunity as blatant as this one. If we had a choice to not use oil I might be a little more subdued, but we don’t. Add to this equation the fact that we have put ourselves in a position where we have no choice but to import oil for a very long time and you have a win-win scenario for this play.

Add the increasing demand by the developing world, which will only accelerate in the years to come, and you have a tiger by the tail. The only question is how long you will give it to work.

As with any strategy time is the real issue.  What if this doesn’t begin to work until late this year, or early next? So what. Give this time to work and you have as close to a guaranteed short term double as I have ever seen.

Oil is only one of many plays that will make millions over the next 18 to 36 months. This is the best buying opportunity since the market collapse of the late 70’s.

Turn off the TV’s negative talking heads and start looking at the positive of this mess. All it will take is a little patience to make a fortune.

Source: $75 Oil This Year and it Can Put a Lot of Money in Your Pocket