The MacroShares fund is designed to gain in value as crude oil falls in value. More specifically, a $4 change in oil prices should be roughly equivalent to a $1 move in the MacroShares.

I added the MacroShares to the Wildcatters Portfolio in an early September flash alert, Fundamentals, Psychology and the Overshoot, when oil prices were still trading above $100 per barrel. My rationale was that in the near term, the oil markets would remain focused on the demand side of the equation; traders would continue to fret over the effects of a deep US recession and credit market malaise on oil demand.

In addition, another factor I watch is how oil reacts to bullish news. In August and September, we saw several potential bullish catalysts for crude including a series of hurricanes that shut in production and refining capacity as well as a number of weekly inventory reports that indicated tight supply. But oil never managed more than a short-term rally in the wake of any of these events. When markets fall in reaction to bullish news, it’s a sure sign of trouble ahead.

Oil prices have fallen a lot further than I expected. There are a number of reasons for this, but the most important is that the credit crunch worsened more than I expected in late September and early October. The lack of credit availability forced a massive deleveraging process that helped push oil prices lower much more rapidly that I had thought. The MacroShares acted as a hedge in this environment, gaining value and helping to offset some of the downside we saw in other energy-related shares.

But crude oil has hit bottom for 2008. Clearly, falling demand and a US recession will remain concerns for the oil market in coming months. However, oil has fundamentally overshot to the downside just as it overshot on the upside in June and early July of this year. Oil is already pricing in a deep US recession at current levels.

I see three factors pushing crude higher into year-end: an end-of-year rally in the broader market, supply-related concerns and further easing of the global credit markets.

I’ve outlined my case for a year-end rally in stocks generally and energy stocks in particular in the past few issues of TES, so I won’t repeat those arguments here. At the current time, crude oil and the S&P 500 are highly correlated. The reason is that both the broader market and oil markets are worried about exactly the same issue: a weak US economy. Therefore, I expect energy prices to rise in the context of a year-end rally with oil perhaps rising back into the $90- to $100-per-barrel range by early 2009.

Second, as I noted in a blog post to At These Levels (www.attheselevels.com) yesterday, I’m looking for supply concerns to gradually become a larger issue over the next few months. Current estimates of non-OPEC (Organization of the Petroleum Exporting Countries) supply growth for 2009 are pure fiction, particularly with spending likely to moderate as long as oil remains under $80 per barrel. The International Energy Agency (IEA) is publishing its annual World Energy Outlook on Nov. 12; some information from the report has already been leaked, and the word is that production from existing oil developments is falling a good deal faster than previously thought.

Finally, the TED spread—a measure of credit market distress I’ve highlighted in the past few issues of TES—is now falling rapidly. I suspect that trend will continue as governments the world over attempt to recapitalize the global banking system. Looser credit markets will help ease the fund deleveraging process that’s been pushing oil prices and related stocks lower in recent months.

Although I’m recommending you sell the MacroShares and take a nice profit, I’m also recommending you hold on my other recommended oil hedge, Delta Airlines (NYSE: DAL). The airlines are big winners from falling jet fuel prices. Delta’s stock is up sharply from my original recommendation back in July.

However, as long as oil prices remain under $100, I suspect sentiment will remain positive on the airlines. And the group will also likely benefit from a broader market recovery into year-end. Delta rates a buy under $12.