Deep-Water Oil Rig Companies to Replace My DXO?

Deutsche Bank is closing out DXO, double-long oil ETN, thanks to the government's regulatory crackdown that is more likely to come sooner than later (margin requirement change, particularly on commodities trading). I had no intention of selling my DXO, and was planning to hold long-term as I see a long inflationary period (even if the economy is in doldrums) ahead.

But as of September 9 (some say it's September 12), I will have no choice but sell my shares back to Deutsche Bank (I think this bank is way extended in commodities markets - soft (ag), oil, and precious metals). Other leveraged long oil ETFs may have a similar risk of being shut down. The very fact that DXO is being shut down but not DTO (double-short oil ETN, also from Deutsche Bank) indicates to me (I could be very wrong, but) that the oil price is going to go up very soon. In order for DBank to create a synthetic double-long position (DXO) someone has to take the other side, and that someone is less and less willing to take that position, either because the oil price will go up soon and he will get royally squeezed, or the new margin requirement is just too much, or both.

So, I am forced to look for alternative plays without using leveraged ETF/ETNs if I think oil is still going up. For that matter, without using any ETF to be extremely safe. (Look what happened to UNG.)

I've started looking for oil-related stocks that are still forming a base. The first batch of such companies are oil rig companies:

• Transocean (RIG)
• National Oilwell Varco (NOV)
• Pride International (PDE)
• Oceaneering International (OII)
• McDermott International (MDR)

RIG and PDE provides off-shore contract drilling and OII and MDR are engineering companies who coordinate off-shore oil rig operations. NOV manufactures actual hardware.

BP's newly discovered under-water oil field in Gulf of Mexico, the well was vertically dug 10,000 meters under 1,400 meters of water. It was a job by Transocean, and it is probably the deepest well ever dug in the world.

Anyway, here are the charts. I like RIG, NOV, and PDE, then OII and MDR.

DXO Revisited - Now Where?

In 2 weeks since I studied the chart of DXO, double long oil ETN, DXO has broken out of the upward-sloping channel to the upside. It ended today at $4.63 during regular hours, and went to $4.70 AH, probably due to the news of a Chevron's facility in Nigeria being bombed.

I have DXO which I accumulated over time, with the average cost of about $2.45 per share. I do have my targets, and one of them has been achieved when it broke that channel upward.

Here's an updated DXO 8-month chart. This ETN is new, so the chart does not go back beyond June 2008. (This ETN was introduced at the height of commodity bubble.) From the short history of this stock, it looks like the next possibility is slightly above $6, a 30% increase from today's price. Since this is a leveraged (double) ETN, the underlying index would need to increase by 15%. Roughly speaking, that would mean the crude oil, currently at around $70, would have to go up to $80.

15% increase in crude oil would also translate to USO, unleveraged oil ETF, to go to $43, where it would meet 200-DMA.

So, $6 target for DXO, or crude oil going to $80 or USO going to $43, seems like a good target for now. The chart shows DXO is in the middle of nowhere right now, having just broken out of the channel. Backtesting is a possibility, and that backtesting could overshoot to the downside. But overall, just like natural gas, I can't picture oil to go back down below $40 again.

DXO Steadily and Quietly Moving Upward

Despite the world as we've known it is coming to an end, oil still lives, and recently it is showing the sign of increasing strength. I have DXO in my holdings which I purchased over time from December 08 till mid March 09. At first it was a "put" against geopolitical risks (Middle East), and in February and March I added more. I didn't think the oil price would go below $30 any more. After that, I didn't even carefully look how it was doing.

Well well. Slow and steady wins the race.

DXO is an ETN that tracks 200% of the daily return of the Deutsche Bank Liquid Commodity index. It had a misfortune of making the debut just when the commodities were correcting from their top. In today's ugly market that turned suddenly negative on Treasury auction news, it is still holding gain of about 2.5% with about 20 minutes left.

It's been in a rising channel since February, and right now it is hitting against the upper channel again. That happens to coincide with the resistance line from last November. It may finally break above this line and the channel.

I still don't think the crude oil price will go down below $30, or $40, even $50, recession/depression notwithstanding. It will be supported by inflation that the governments all over the world are trying desperately to create. (Just wait till the huge monetary base gets unleashed...)

It is, in a way, still a geopolitical hedge (it's a hedge against government actions). Too bad I only have 1500 shares.