At a time when stocks are hitting highs, oil prices have been cut in half. Relative to past prices, it is tempting to call oil “cheap” and buy it. Indeed, there are many bullish calls by analysts to do just that. I receive a very large number of emails, and investors are showing a high interest in buying oil ETFs here for the long-term. Let us first try to answer a very simple question, “Will oil go to $33 to $75?”

To answer, please take a look at these two charts.

Please click here for an annotated chart of oil price and U. S. shale production.

Please click here for an annotated chart of world liquid fuels production and consumption balance.

Let us examine both the technicals and fundamentals at this time.

Technicals

Based on oil’s current trading pattern, from a medium- to long-term perspective, traditional technical indicators in the categories of momentum, trend, volatility and volume are not only useless, but they are also likely to mislead investors into making wrong decisions.

There is some merit to looking at Fibonacci extensions. These extensions are shown on the chart. The chart is of NYMEX West Texas Intermediate crude-oil continuous contract. For trading purposes, the symbol is CLU25, .

Fibonacci extensions show downside potential to $33 and upside potential to $75. Interestingly, these levels are also in line with the analysis from the Quantitative Screen of the ZYX Change Method; this screen is based on supply and demand levels. The chart also shows the first resistance and first support levels. The background color of the chart is a composite of some of The Arora Report long-term indicators; green is bullish, red is bearish and blue is neutral. Our long-term models have been bearish on oil for a long time. It also shows trades taken by The Arora Report in oil.

Fundamentals

The oil price chart, on the top left-hand side shows U. S. shale production doubling from two million barrels per day to four million barrels per day. During this period, oil should have fallen, but it stayed rangebound between $90 and $120. The reason was that a vast majority of analysts remained bullish on oil with flawed models, as they were underestimating shale-supply growth and overestimating China demand growth. The chart also shows the point when OPEC decided not to cut the production. The OPEC announcement led to the opening of the flood gates for selling oil, and it had become obvious that analysts were wrong.

The second chart shows the world liquid-fuels production and consumption balance. Supply simply exceeds demand. With one exception, the fundamentals have not changed from what I described in “Nine reasons the price of oil will go lower.” The new development is the nuclear agreement with Iran. In our analysis at The Arora Report, we feel most analysts are likely to be proven wrong in their assessment that it will take Iran a long time to bring oil production to pre-sanctions levels. In our analysis, Iran will reach 3.5 million barrels by mid 2016.

Not investable, but tradable

At this time, oil is simply not investable from the long side. Downward pressure is likely to continue. However, there will be many trading opportunities from both long and short sides. For an example, please see, “What does the chart say about oil?“

The trouble with ETFs

Trading futures is not suitable for most investors. Fortunately, there are many ETFs such as United States Oil Fund LP USO, -2.65% ProShares Ultra Bloomberg Crude Oil UCO, -4.95% , iPath Goldman Sachs Crude Oil Total Return Index ETN OIL, -2.81% , VelocityShares 3x Long Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return US:UWTI and United States 12 Month Oil Fund LP USL, -2.66% .

There are also inverse ETFs that profit from oil going down. These include United States 12 Month Oil Fund LP SCO, +4.76% , DB Crude Oil Double Short ETN US:DTO, DB Crude Oil Short ETN US:SZO and VelocityShares 3x Inverse Crude ETN linked to the S&P GSCI Crude Oil Index Excess Return US:DWTI.

Investors may choose to focus on USO and SCO, as they offer the most liquidity.

The trouble with these ETFs is that they exhibit significant tracking errors. An investor can easily be right on oil, but the ETF may not perform in line with the oil move.

The reason behind these tracking errors is that most of these ETFs invest in oil futures instead of buying or selling oil. Oil futures expire, and the funds have to go into the next contract. The price adjustment does not always work in the ETF holders’ favor. Typically, an ETF is buying high and selling low as it rolls into new futures.

For the foregoing reasons, oil ETFs are not suitable for holding more than a few months.

Price forecast

Oil is the most volatile commodity, and our price forecast is revised weekly. We expect it to trade in a very wide range. Here are our forecast ranges at this time.

2015 — $33.00 to $62.00

2016 — $33.00 to $75.00

2017 — $55.00 to $85.00

Disclosure: Subscribers to The Arora Report receive information on oil in real time and may enter positions on oil without any notice to the readers of this article.

Nigam Arora is an engineer, nuclear physicist, author, and entrepreneur and the founder of two Inc. 500 fastest growing companies. He is also the developer of theZYX Change Methodto profit from change by investing. Arora is the chief investment officer atThe Arora Reportand the editor of four newsletters that track the ZYX Change Method. Nigam can be reached atNigam@TheAroraReport.com.