THE PEAK OIL

INVESTOR
First Quarter 2015 Written March 8, 2015
Erik Townsend

In this issue

Since the last issue

Understanding the Baker Hughes Rig Count
Crude Oil Market Outlook
Tank storage, Floating storage, and Waiting storage
This is Ground Control to David Rosenberg!
Trading Strategies

Since the last issue

When I published my Q4 letter in early December, front-month West Texas Intermediate
crude was trading around $67. I said I was staying short and still expected lower prices, and
predicted that the market would first overshoot to the downside and then eventually stabilize
around $50.
In many ways, my predictions have already come true. Heres the WTI Chart:

Exactly as I predicted, the market sold off well below $50 (bottoming at $43.58 on January
29). An article in the Wall Street Journal (debunked later in this letter) proclaimed that the

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Baker Hughes rig count released on that day portended a recovery in prices, and that article
appears to have been the primary catalyst to spark a snap-back rally to the 50-day moving
average. In just 3 days WTI climbed all the way back to $54, nearly a 24% rally from the
intraday low on Jan. 29th. The market is now consolidating along its 50-DMA line, which has
turned almost flat at just under $50/bbl.
In many ways it would appear that I called it perfectly, and that the bottom is now in at $43.58,
and we might expect the market to only go up from here. But I dont think so. The Jan 29th low
came too early to be the final low. All the production estimates Ive seen suggest that U.S.
production will peak around April or May. Were still seeing huge inventory builds every week,
and theres a very real risk of running out of on-land storage capacity. The alternative is
floating storage (tanker ships chartered for the purpose of storing rather than transporting oil),
but to really make that alternative viable, wed need a steeper 1-year contango in the market,
meaning either the front month has farther to sell off or the back months are going to rally
first, ahead of the front months, widening the contango spread. I think the former is far more
likely, and my expectation is that the final low will be below $40 sometime later in March or in
April. I could be wrong and the bottom may already be in, but I doubt it.

Understanding the Baker Hughes Rig Count

It never ceases to amaze me how ridiculously incorrect ideas can move markets when the
right person or publication says them. In the case of the 24% 3-day rally off the Jan. 29th lows,
the principal catalyst for the move appears to have been the Wall Street Journals
proclamation that the Baker Hughes Rig Count report had been exceptionally soft. WSJs
analysis concluded that less new oil wells means less oil production, and therefore, prices
should be expected to recover. Sure enough, the Baker Hughes rig count became the
buzzword de jure in all the financial media for the next few days, and prices rocketed back up
to key resistance at their 50-day moving average.
At risk of confusing the WSJ story with actual relevant facts, that was actually the 7th soft
weekly rig count report in a row, and all the prior soft rig count reports had resulted in an
acceleration of the downward sell-off in oil prices! But now, suddenly, the exact same bit of
information suddenly had the exact opposite meaning it had for the previous 6 weeks in a
row! Why? Because The Wall Street Journal said it. Then it went viral. I even heard one of the
journalists on a financial cable channel proclaim The rig count is way down and that means
theyre starting to cap producing wells! Hello? Is it really possible that we live in a world
where the financial media are so categorically incompetent?
First of all, the rig count refers to drilling rigs that are drilling new oil wells. Assuming were
talking about tight oil wells that rely on multi-stage hydraulic fracturing to release the oil from
the rock, those wells still have to be completed after they are drilled, and the fracking process
is a big job. Drilling rigs operating today are creating new shale oil wells that wont begin
actually producing oil for at least 6 months. This has absolutely nothing to do with capping
wells as the cable TV anchor put it. (The industry jargon for what he was talking about would
be shutting in producing wells, and thats not happening yet).
The reason the rapidly declining rig count is actually a bearish indication (yes, the esteemed
Wall Street Journal got it exactly backwards) is that it indicates that oil exploration and
production companies (who presumably have the best data) know this supply glut is not over
yet. If they thought it was over, they wouldnt be scuttling their projects and writing off losses
on deposits already paid to the rig operators.
The WSJs thesis that a reduction in rig count portends lower future oil production and
therefore higher prices is not entirely without merit. Thats exactly what we should expect 6 to
12 months into the future. A reasonable way to have interpreted the soft Baker Hughes rig
count print would have been to predict crude oil futures for delivery months 6-12 months into
the future to go up in price, as near-dated contracts simultaneously continue to fall in price
because the supply glut is being caused by wells already in production that wont be shut in

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unless prices drop below the cash cost of production, which is approximately $35 for the
median shale operator.
The way you would test the hypothesis posited by WSJ would be to look at the 1-year
contango spread, meaning the difference in price between the near delivery month and the
same month of the following year. That spread actually contracted on Jan. 29th, directly
refuting WSJs hypothesis. If only WSJ had the sophistication to do their homework!
More to the point, the WSJ analysis focused on the wrong question. The excess of U.S.
production is coming from wells already in production. Its true that laying down of drilling rigs
(lower rig count) will prevent that problem from being made even worse in the future, but so
far as resolving the current supply glut dilemma, the rig count isnt whats important. What
matters is what options exist to deal with the excess oil being produced from wells already in
production.
Thanks to the very steep decline rates associated with tight oil plays, that supply imbalance
wont last forever if the drilling rigs are laid down, which is clearly happening. But the data Ive
seen suggest we still have a couple more months of increasing production and were already
producing more than were consuming. Where does the extra oil go? It has to be stored.
Fortunately, as of last summer we were operating at near record-low inventory levels in the
U.S., so only a few months ago we had plenty of room to store a whole lot of oil. But no more:

th

As of February 20 , we were at 60% capacity nation-wide, and growing rapidly. There was
just less than 200 million barrels of remaining storage capacity. When we consider that the
excess of supply over demand is about 1 million barrels per day, it would seem that we have
almost 200 days, or about 6 months, before the tanks fill up and more expensive floating
storage becomes the only viable alternative.
But theres more to the story than that. A popular trading strategy sometimes called collateral
mining goes like this: A big institutional player doesnt want to speculate or take any market
risk. They only want a sure bet. So they buy a lot of physical crude oil. Not futures contracts,
but actual physical oil that they pay to store in tanks in Cushing, Oklahoma. For sake of
argument, lets say they bought 10 million barrels of oil, using up about 5% of the remaining
storage capacity. They dont want to take any market risk, so they go short 10,000 frontmonth futures contracts. The two positions exactly balance out (long 10 million barrels
physical, and short 10 million barrels worth of futures contracts), so they have no market risk.
But heres the trick: When that front month futures contract expires, they have to roll their
short (hedge) position forward to the next delivery month.
Lets say they were short the April contract, and roll to the May contract. Well guess what?
Were seeing record 1-2 spread contango right now. Thats just a fancy way to say that the

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May contract is priced more than $2 higher that the April contract. So they get to cover their
hedge at one price and simultaneously put it back on in the next delivery contract by selling
$2 higher. That $2 difference is pure profit (its called contango yield) to the investor!
Hey wait a minute, can that really be true? $2/bbl on barrels priced around $50 is a 4% return
in one month! And this is a risk-free trade because the position is fully hedged. The investor
has to pay storage costs for the oil sitting in a tank in Cushing, but the storage fee is way less
than the contango yield, and he still enjoys a double-digit annualized risk-free return. Sound
too good to be true? It really is true, but it wont last long. Eventually the market will stabilize
and we wont have $2+ contango on the front-month futures spread. But for now, yes, this
trade really is possible. More to the point, its irresistible to those with deep enough pockets to
put it on in size, so we should expect them to pile into the trade as fast as they can. Using up
the remaining storage capacity as they do.
My point is simply that we dont necessarily have 6 months before storage fills up, as many
analysts have concluded from the degree of oversupply and the number of barrels of storage
capacity still remaining. There is a very strong economic incentive for investors who are
sufficiently sophisticated (and capitalized) to buy all the physical crude they can get their
hands on, store it, and make a killing on the contango yield for as long as it lasts. Some day
the contango will disappear and theyll just deliver the oil into the short contract theyre
already holding rather than rolling it. But until then, theyre making a killing. How is that
possible? Where does all this risk-free money theyre making actually come from? The
answer is out of your pocket if youre not careful. Ill explain that risk in the next article below.
I suspect the reason were suddenly seeing 10+ million barrel weekly inventory builds is
precisely because this exact trade is being put on by the biggest investment banks and hedge
funds. Theyre a very enterprising lot, and it wont surprise me if they manage to fill up
substantially all of the storage tanks faster than anyone expects. What happens if they do?
The front month price gets pushed WAY down because theres no place to put the oil. And
what does that mean? A wider 1-2 (first to second delivery month) spread, and an even
higher contango yield for the bankers!
A final point on the rig count: Tight oil plays are a two-part process. The first step is to drill the
well, and thats what the [drilling] rig count tells us: how many drilling rigs are drilling new
wells. The next step is to hydraulically fracture the newly drilled well. At first it might seem this
is just the next logical step, and the drilling rig count and fracking crew count must be
identical. Not true! Quite a few drilled wells have not been completed, and there is now a
huge frack-log of drilled wells that have not yet been completed (fracked). A lot of people are
talking about the rig count as if its a measure of how many new wells are about to start
producing, and this just isnt true. Its not until those drilled wells are completed that they can
be placed into production, and there are now 3,000+ drilled wells that operators have deferred
completion on. See Tank Storage, Floating Storage, and Waiting Storage later in this issue for
more perspective on what this might mean for the market in coming months.

Crude Oil Market Outlook

Ok, so what does all this mean and what can we expect from here? My guess is that the
bottom isnt yet in. Admittedly, I thought the snap-back to the 50-DMA would only last a
couple of days, and that prices would promptly roll back over to new lower lows. So far that
hasnt happened, as the media have been obsessed with the bottom is in calls. But the
supply-demand dynamics just dont support a bottom here. My forecast is that prices should
soon move considerably lower.
If my prediction (in the prior article) about big hedge funds and banks piling into the collateral
mining trade comes true, we could see sudden and dramatic inventory builds possibly as
high as 20mm bbl in a single week. If that happens, most market participants will incorrectly
conclude that this means the supply-demand imbalance is that large, and a panic sell-off will
result. Of course the supply glut isnt really any bigger than it was last week. All that will really
be happening is the bankers are setting themselves up to make a killing at the expense of

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everyone else. But thats a trick they have considerable experience with, so my confidence is
high that they wont miss this opportunity.
Remember if prices start selling off in a panic type of event, that just means that the
contango in the 1-2 spread will widen even more. That increases the bankers profit markedly.
Now, you dont think any good upstanding banker or hedge fund manager would ever stoop
so low as to make public statements that induce a panic just for the sake of making a higher
risk-free return for themselves, do you? No, that sort of thing never happens
So I think the downside from here may still be considerable in terms of WTI front-month
prices. But heres the problem: What makes the most money for the bankers is a supersteepening of contango? Lets say that sometime in April, the May WTI contract crashes all
the way to $30. Holy cow, you think, this is an epic low and time to buy the USO (crude oil
ETF), right? Not so fast! Where does that risk-free profit for the bankers actually come from?
Its all in the contango yield. And who pays that? The commodity ETFs like USO that hold
long futures contracts and have to roll them forward every month, constantly selling low (front
month) and buying high (next month) futures. In a bizarre and perverted way, the retail
investor who buys USO trying to get in at the bottom is actually subsidizing the biggest banks
and hedge funds risk-free returns!
I think that oil E&P companies (a popular ETF for those is XLE) are likely to be the hardest hit
by this. The fact that prices for oil to be delivered just a few months into the future will still be
above $45 wont enter the psyche of most investors. If we really get an epic sell-off in front
month futures, the market will interpret that front-month price as the new reality, and the
XLE could crash. That will probably be the best buying opportunity buying E&P shares
when the front-month price bottoms. The key will be to value them based on moderately
longer-dated WTI futures prices rather than using the artificially depressed front month.
Heres the XLE chart as of March 6:

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XLE peaked at $101.52 back in June. At $77, its only down 25% from its high, in a market
where crude oil was down over 60% and is still 53% below its high. Right now, my sense is
that surely, the bottom must be in now sentiment is ruling the day. If we see WTI trade well
below the prior $43.58 low, as I believe is likely, I think XLE could crash in a panic sell-off. It
will be a strong buy (at a much lower price) when oil prices finally bottom.
Buying USO at the bottom would expose the investor to a big tracking error due to subsidizing
the bankers contango yield. But XLE is more likely to discount the lowest front-month price as
a proxy for future revenues, making it a safer play from the bottom in crude prices.

Tank Storage, Floating Storage, Waiting Storage

By now the concepts of domestic storage (meaning big tanks in the USA where crude oil can
be stored) and floating storage (meaning crude oil tanker ships that can be used to store
rather than transport crude oil) are understood. Guess what? We have a new kind of storage
hitting the market. Im calling it waiting to produce storage. I think it could play a big role in the
term structure of WTI crude futures in coming months, and most analysts dont yet
understand it.
There are presently more than 3,000 oil wells that have been drilled but not yet completed
and placed into production. At first glance, it would appear that there must be a backlog of
wells awaiting completion crews to put them into production or something. But theres more to
it than that. These wells are not waiting for the completion crew to show up and start fracking.
Rather, these are wells whose owners have made a conscious decision to defer completion
for now.
Put yourself in the shoes of a shale oil producer. Youve got a bunch of wells already drilled.
The capex is already sunk drilling the well, so youre darned well going to put that well into
production, sooner or later. But hold on if you rush the process and get that well up and
running, producing next month, youll be selling into the May15 delivery contract, which
closed at $51.47 on March 6th. But look at the April 2016 contract It closed at $60.13! So
instead of selling the April15 contract and then having to rush to produce that oil in time to
deliver into that contract, you could instead sell the April16 contract for almost ten bucks a
barrel more! Then you just sit on your drilled but not yet completed well until early 2016, and
take your time getting into production this time next year!
Why is this important? Again, put yourself in the shale operators shoes. If he sells into the
April15 contract, hes going to have a real hard time breaking even. But if he can weather a
one year delay getting into production, he can get almost 20% more for the same oil. More to
the point, if he waits around to see what happens next in this market, those longer dated
contracts might start dropping in price. But if he moves right now, he can start selling the
longer-dated contracts that are still trading at a considerable premium (contango), and then
slow down his production crew to be ready to deliver against higher prices he locked in today.
For many operators, $60 is above their break-even price, but $50 isnt!
My whole point here is that the shale operators have a strong incentive to idle already-drilled
wells for a year, and start selling the long dated contracts now to take advantage of the
higher prices. That means a whole lot of selling of long-dated contracts that would not
otherwise occur, and that, in turn, means we can expect the steep contango in the one-year
forward strip to flatten out as more shale operators figure out this opportunity.
Bottom line, for those of us who are keen to buy long-dated crude oil futures when the
market bottoms, it will be important to monitor this trend. It may be that the longer-dated
contracts bottom several weeks or months after the bottom occurs in the front-month.

This is Ground Control to David Rosenberg!

Im dumbfounded by the number of really smart people whom I respect that have all begun
shaking their heads and rolling their eyes, exclaiming How could anyone possibly think that

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lower energy prices are anything but unequivocally GOOD for the economy? David
Rosenberg (for whom I have great respect) is one such voice, and there are many others. So
let me try to explain it for them
Nobody I can think of is saying that lower energy prices (unto themselves) are bad for the
economy. What quite a few of us are saying is that the combination of persistently high oil
prices and easy money policies from the Federal Reserve over the past few years led to a
massive mal-investment, to borrow a term from Austrian economics, in the shale patch. Now
much lower oil prices dictate that this mal-investment in the shale patch must now be
unwound. That will be the source of the coming economic damage the unwinding of yet
another financial excess funded by reckless easy money policy from central banks.
Myriad tight oil projects were funded based on an economic viability analysis that assumed oil
prices could never go below $75. If that sounds like it rhymes with Housing prices could
never go down across the board because they never have before, thats because its exactly
the same perverted logic! In some cases, its actually the same individuals who created the
subprime debacle who were behind the massive boom easy money lending to shale drillers in
the form of junk bond issuance. Why these guys still have jobs baffles me.
The common belief that lower oil prices do not threaten the shale drillers because they were
hedged is a fallacy. The shale operators didnt hedge all of their forward production. They only
hedged as much as they had to in order to satisfy their bankers. And because of Fed easy
money policy, lending standards were incredibly low. In some cases, they even used socalled 3-way collars, meaning that the lower end of a collar hedge is implemented by a put
spread rather than an outright long put option. This means that some of these operators were
hedged only down to a lower threshold, typically $60 to $75, below which it was assumed
protection was not needed because it was thought that prices could never go that low. Some
of these guys are now effectively unhedged, and I predict that a massive wave of junk bond
defaults in the shale patch may be just over the horizon.
Shale operators arent the only example of mal-investment that occurs as an unintended
consequence of the Feds easy money policies. Look no farther than the Baltic Dry Index,
which recently touched an all-time low. How is this possible unless the global economy
literally stopped and nothing was being shipped across oceans anymore? The answer is that
theres been a massive boom in shipbuilding in recent years, thanks to central bank easy
money policies. The Baltic Dry is exposing that boom for the mal-investment it truly was.
How is it possible that the stock market keeps on pushing through to new all-time highs, even
as macro data have been deteriorating notably in recent weeks? In my opinion, the primary
driver has been share buy-back programs that serve to enrich corporate officers for running
up the price of a companys shares by buying them hand over fist with easy money borrowed
in the corporate bond market thanks to the Feds easy money policies.
But is any of this sustainable in the long term? Can this new normal of central bank largesse
and easy credit policies continue indefinitely? And what will happen when the spigot is turned
off and the easy money dries up? What will save equity market valuations when theres no
more easy money for share buyback programs?
What will happen to oil prices when theres no more easy money to fund Shale Revolution
2.0? And how will all those corporations ever service the mountain of new debt theyve taken
on to fund share buybacks in an environment where eventually, there wont be any more easy
money to keep their revenue and profits in record territory despite deteriorating
macroeconomic fundamentals?
I predict the next major financial crisis will not be a stock market crisis, but rather a bond
market crisis. Both public and private sectors have pushed the limits of sanity with the
mountain of debt theyve taken on. Central bankers easy money policies are the only reason
this charade has gone on as long as it has, and it cant continue indefinitely.

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The event that will eventually tie the central bankers hands and bring on a major crisis will be
a serious inflation threat. Right now were awash in deflationary pressure, but throughout
history, epic inflations have generally been preceded by periods of deflation. And thats where
I think we are now: basking in complacency, and foolishly believing that central banks can
solve all future problems that might ever develop with the printing press.
A return to historically normal interest rates would literally bankrupt the U.S. government,
almost overnight. What will we do when a tidal wave of inflation eventually hits the economy?
Paul Volcker himself has said recently that because of the excessive national debt, it would
be completely impossible to defeat a runaway inflation by raising short-term interest rates the
way he did in the early 80s.
This cant go on forever. At some point, we have to face the stark reality that the cause of the
2008 Financial Crisis was that the world had borrowed and spent beyond its means, and the
over-financialized economy had been stretched to its limit. The policy response has been to
borrow and print even more money, socializing Wall Streets losses and permanently
encumbering the public balance sheet with an unserviceable debt burden that threatens the
prosperity of future generations. This is analogous to a person living beyond their means on
credit cards resorting to applying for even more new credit cards so they can use cash
advances on the new card to make the minimum payment on the existing accounts!
This will end very badly, and any stock market crisis that may result will pale in significance to
the bond market crisis that could cripple almost all Western economies. Our elected leaders
are doing everything possible to make the problem worse, gaining only a delay in how long it
takes before the inevitable occurs.
The bigger the ship, the longer it takes to change course. And the U.S. economy is an awfully
big ship. Im astonished this has gone on for 6 years now, and I have no idea how much
longer it has to play out. But eventually, were going to see a credit market crisis that eclipses
anything weve ever seen before.
What will be the catalyst to reverse the deflation trend and bring on a crippling wave of
inflation? One possibility is that the carnage in the junk bond market from shale operator
defaults could de-rail the financing for a second shale revolution. Oil prices could rise
dramatically from below $50 to above $150 in the course of less than a year. Im not
necessarily predicting that outcome, but I think it entirely realistic, and Im not sure the
economy could survive the blow.
So, Rosie, how is it that oil prices could be a bad thing for the economy? The answer is they
would be a good thing if they were occurring because of a sustainable, structural condition of
adequate supply to meet demand. But thats not what were experiencing right now. The
current rout in energy prices is an anomaly. Its just one facet of the unorderly unwinding of
mal-investment in the shale patch, which occurred primarily as an unintended consequence of
central bank easy money policies. First we get the positive unintended consequence
cheaper energy prices and a boost to the economy. Next comes a junk bond market
dislocation, and then eventually, much, much higher oil prices after the reality of the shale
patch mal-investment is widely understood and theres no more easy money to fund the next
chapter of the shale miracle saga.
And oh, by the way, dont forget that the big elephant fields of the middle-east are already in
an irreversible state of decline. Were living in a temporary delusion that is giving us
temporarily low energy prices at the probable expense of much higher energy prices a few
years down the road. Yes, its true that there are short-term benefits to the economy from this
temporary reprieve in oil prices. By the same token, heroine feels good at first. But eventually
it wreaks havoc and kills the addict. The amount of junk bonds issued by the shale operators
is comparable to the amount of subprime mortgage-backed securities outstanding in 2007.
Whether we experience another credit contagion remains to be seen.

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Trading Strategies
I dont think the final bottom is in yet in oil prices, but I do think its fast approaching. If I had to
venture a guess for when and at what price the bottom will occur, Id be more comfortable
betting on the timing than the absolute price figure. This is all about whether we run out of
storage capacity before production figures fall back in line with demand, and its hard to tell
what will happen because there are feedback loops that encourage more speculation if prices
begin to fall dramatically from here.
I expect the bottom to occur early in Q2. If I had to wager a guess as to when, Id say just
before the May WTI futures contract expires on April 21st. What will drive prices to exhaustion
lows will be if we have a futures contract nearing expiry, and theres not enough storage
capacity available to buy and store the oil. Once the on-land storage capacity is used up (if
that happens), the price has to keep falling until it becomes economic for hedge funds to
charter even more VLCCs as floating storage. That would be the likely driver of a final
exhaustion low in front-month prices, almost certainly occurring at a very significant discount
to the subsequent delivery month price.
Theres a good counter argument that production is expected to peak in the next couple of
months, and for the moment we still have almost 200 million barrels of spare storage capacity
to draw on. But as I described earlier, that could be snapped up by savvy traders faster than
the supply-demand imbalance would appear to dictate.
When we reach bottom, I wont be at all surprised to see a final capitulation in E&P equities,
so XLE would be a strong buy, but only if its sold off considerably from its present levels.
WTI futures are much harder to play, because of complexities in their term structure. On one
hand, its tempting to just back the leverage truck up and go massively long front-month
futures when it appears the bottom is in. The problem there is that any really deep drop in
front-month prices will likely be coupled with an extreme steepening of contango. The big
boys who can afford the $100 million plus proposition of chartering their very own megaship
for the occasion will do extremely well. But for the rest of us, its a question if which contract to
buy, and whether it will see further downside pressure as it nears expiry.
Its tempting to just go long a later-dated contract say, 1 year into the future, so as to avoid
th
the question of timing the bottom. The problem there is contango. As of March 6 , frontmonth WTI was below $50, but youd have to pay more than $60 to buy the same contract 1
year out. Thats not to say its a bad deal I definitely think oil prices are headed well north of
$60 in the next year. But what if spot prices stay low for longer than a few months, and that
contract trades down to $50 before it eventually moves much higher? If youre trading with
leverage, you could get shaken out pretty easily. And dont forget the waiting storage angle
discussed earlier. If you buy contracts dated a year into the future, you risk having them be
bid down in coming months as shale operators rush to sell into any contract still priced high
enough for them to break even!
I like the idea of buying call options on very long-dated contracts. 2019 and later. Using the
December 2020 contract for sake of argument, youre looking at another ten bucks of
contango that contract is trading just below $70 as of March 6. But that extra ten bucks
bought you four more years for the price to appreciate. The first ten bucks of contango only
bought you one year. I really cant say with any certainty that crude oil prices will be markedly
higher a year from now. But Ill be very surprised if theyre not much higher by Dec. 2020.
The problem with call options is that the premium you pay for them is primarily a reflection of
market volatility. When this market finally bottoms I think it could be a very violent, final
capitulation low, and that means implied volatility will be through the roof. So unless we see a
very rapid V-shaped recovery in prices, which seems unlikely given the storage capacity
situation, theres a strong argument that call options should bottom in price considerably later
than their underlying futures contracts bottom, because it will take some time for implied
volatility to settle down.

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The bottom line here is that this could be a really messy process, and you need to anticipate
some volatility. The moment when the ultimate low front-month price occurs is not the same
as the moment when longer-dated contracts bottom, and buying front-month exposure with
the intention of rolling it forward as it nears expiry invites the risk of having to subsidize a
really fat contango yield for the bankers who put on the collateral mining trade.
In short, theres no free lunch and getting in at the bottom will be a real challenge, even for
traders who correctly gauge when the final bottom is in for crude oil prices. For anyone other
than professional traders who have their finger on the pulse of the market all day long, I think
the most prudent course of action would be to start dollar cost-averaging into ETFs like XLE
and OIH beginning in April, reaching your full target allocation by June. Thats my best guess
for the window of time during which the bottom is most likely to occur, assuming it hasnt
already.

IMPORTANT DISCLAIMER
Erik Townsend is not a Registered Investment Advisor, nor is he a Broker Dealer. Nothing in
this letter should be construed as investment advice. This information is presented for
entertainment and informational purposes only. Always consult a licensed investment
professional before making important investment decisions.

2014 Erik Townsend www.eriktownsend.com

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