Why I'd Buy Physical Oil, Not Energy Stocks

Enjoying the lower gas prices lately? Well, now's the the time to fill up your tank some more because oil prices may be on their way up again.

The chart on the right (Click to enlarge) shows the ratio between energy stocks and crude oil prices, and in the background is oil price. Notice that high points in the ratio are associated with a bottom in oil prices. If you subscribe to the commodities supercycle theory, this may be your chance to stockpile on oil again. Looks like this is exactly what Jim Rogers is doing.

As a commodities bear, I personally do not believe this is a long-term buying opportunity for oil. There are three conditions that need to be met for me to consider commodities.

1. Currencies of commodities producing countries bottom.
2. Real assets become undervalued to financial assets.
3. U.S. dollar about to enter a long-term bear market.

Currently, none of the three conditions are met, which means any bounces in oil are merely bear market rallies within a long-term commodities bear market.

Disclosure: None

Comments

[Socialism c...:]

Guess it depends whether you wanna buy on the way down, or on the way up, whether your 3 conditions must be fulfilled before you buy commodities! I've seen enough to know that those 3 are coming...and I'm buying now.

Long FCX, AUY, BP.

2008 Dec 12 02:53 PM

[LilBob:]

If by general building you mean concrete and rebar manufacturers then I think your spot on Zero. With the Obama administration's talk of a Rooseveltian push for infrastructure building we're sure to see some market hype that will at least temporarily push up prices. I'm not so sure though about sustained growth in that industry. In fact, as far as building materials go, that sector is already pretty beaten up. Now might be the time to move-see if you can grab shares while they are cheap and try to beat the rush that'll come after the new administration takes office.

As far as oil going up, I think that's a no brainer. Oil is not an unlmited commodity. NPR reported several days ago that Opec leaders are pushing hard to get member nation compliance with proposed production cuts. Why sell cheap when you can cut supply to the market and increase your unit cost? That's just common sense.


On Dec 12 02:53 PM Socialism cannot compete! wrote:

> Guess it depends whether you wanna buy on the way down, or on the
> way up, whether your 3 conditions must be fulfilled before you buy
> commodities! I've seen enough to know that those 3 are coming...and
> I'm buying now.
>
> Long FCX, AUY, BP.

2008 Dec 12 09:31 PM

[Big K:]

Reading Seeking Alpha columnists, I've come to the conclusion that they believe all assets will trend to "0" in value. Stocks, the dollar, and now, even oil. How can both the dollar and oil go to "0" and everything generally be worthless? After a 100 point fall in the price of oil, this genius is now calling a bear market in oil. Duh? Was he doing a Rip van Winkle the last several months? The most oil will go down is another $10-$20, but that is a much smaller drop than the 70% collapse we have already seen. My call is this: The bottom is already in at $40, the dollar is weaking, thus oil will now rise. Honey Bee's prediction is without basis or merit.

2008 Dec 13 02:40 PM

[Greg Pinelli:]

Let's take your THREE bedrock principles and examine them....
1. Currencies of commodity countries (I assume you meant this) rise and fall in response to resource moves..if you wait for a currency to bottom you include in the equaion several things which have NOTHING to do with resources...eg...rate reductions due to financial problems..rate reductions due to unemployment...
2. Irrelevant! Resources don't have to wait for Citibank or AIB to regain profitability before moving forward....
3. The dollar does not have to be in a bear market for resources to climb....the real question is one of supply and demand. Demand could be going MUCH higher while the dollar moves up!
This article is so confused it's hard to know where to begin....oil stocks.taken as a whole...will rise exponentially as oil rises...if your point is that the ratio between the two means a topping..well..so what?
The REAL point for investors is when to plunk your money down...It's when oil falls to points where production is unprofitable..NOW.. I'd invest in both UNG..USO..and a vry solid CEF like PEO..or even ETO.....

2008 Dec 13 08:31 PM

[Pup:]

Oil is denominated in dollars. One might assume that it would "do what the dollar does," but that is incorrect thinking.

Oil, like gold, retains value. Volatile, controlled, but valuable.

It will do the exact opposite of what the dollar does when it tanks. I am all in with USO.

2008 Dec 13 10:35 PM

[Kunst:]

Well dang, I agree with Socialism on something!

Oil is undervalued; the dollar is overvalued. Long DXO and TBT.


On Dec 12 02:53 PM Socialism cannot compete! wrote:

> Guess it depends whether you wanna buy on the way down, or on the
> way up, whether your 3 conditions must be fulfilled before you buy
> commodities! I've seen enough to know that those 3 are coming...and
> I'm buying now.
>
> Long FCX, AUY, BP.

2008 Dec 14 02:49 AM

[NOWHEREMAN:]

Thanks Kunst, I picked up on DXO from another Seeking Alpha Article, but Geo said it was promising but not viable.

Basically, he said investors should not get involved in vehicles which traders use or learn how day traders can move the markets.

Any reason other than price for your selection of DXO?

2008 Dec 14 04:42 AM

[Kunst:]

DXO is a double. If you believe in a thesis, why not double your bet? Of course, if you're wrong, that can be painful. Personally, I don't see much risk. Oil may go down a bit more, it may even stay down for a while, but it isn't going to stay this low for long. All in my opinion, which is sometimes right and sometimes wrong.

2008 Dec 15 02:18 AM

[Anabase:]

i guess most of SeekingAlpha contributors are either American or at least anglo-saxons. please look around you. Yes Oil contracts are now denominated in USD, but thinks are changing, and relatively fast. Decorelation is moving. On the other side, crisis inducing low consumptions (though tough weather in Europe contradict it), States rebuild their reserve at his low price, but consumption will peak up at some point (else you all believe in a total economical collapse). Now look at the producer side. Except venezuela and russia, all middle east will be ready to reduce the production further more. The driver behind is less the fact that they want to control the price than the unfortunatly missing fact that their reserves are heavily overvaluated. And they prepared themselves since a while. so now enjoy commenting, dear mates

Jan 11 08:55 AM