Ideas for Investing in Crude Oil 19 comments
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Oil as a commodity is an interesting real asset. What investments most directly create the economic effect of owning oil itself?
The best answer would be to own an oil well, or better yet, own an entire oil exporting country. However, neither of those options is a practical answer for most investors, certainly not owning a country (unless, of course you are born into the right family).
So what are the practical options for the rest of us? Among others, they include:
- futures contracts
- funds that invest in futures contracts
- exchange traded notes that are priced to a futures index
- royalty trusts that own oil in the ground
- integrated oil companies
- oil & gas exploration companies
- oil & gas production companies
- general energy funds
- alternate fuels
- options on any of the above.
Options are a speculation that expire in time, so we’ll exclude them from the “ownership” consideration. Futures provide a 1:1 price participation, but they also expire with time, and rolling from contract-to-contract can create losses if the far contract is more expensive than the near contract at rollover.
Let’s look at other oil related categories which you can “own” without time limits to see how they correlate with the price of oil.
First, as a base, this chart shows the weekly price of West Texas Intermediate Crude for the past three years.
The charts that follow plot the percentage performance for the past three years for West Texas Intermediate Crude versus an investment alternative — either a directly investable security or an industry group from which you could choose one or more companies to own.
Dow Jones US Energy Industry Group
Dow Jones US Oil & Gas Producers Industry Group
Dow Jones US Exploration & Production Industry Group
Dow Jones US Integrated Oil Industry Group
Dow Jones US Equipment, Services & Distribution Industry Group
Dow Jones US Equipment & Services Industry Group
Dow Jones US Pipeline Industry Group
Dow Jones US Coal Industry Group
Natural Gas
ISE-CCM Alternative Energy Index
Prudhoe Bay (Oil) Royalty Trust
Canadian Oil Sands Royalty Trust
S&P 500 Energy Sector XLE (passive)
Vanguard Energy Fund (active)
Observations:
The equipment and services industry within the oil and gas group is the most leveraged to oil prices — up the most on high oil prices and down the most on low oil prices.
Oil and gas producers and integrated oil companies did not rise as much or fall as much as oil, perhaps serving as indicators of overbought and oversold oil price conditions — more of a long-term outlook than a spot price outlook.
Coal mining companies are highly correlated with oil prices.
When oil gets a cold, alternative energy gets pneumonia.
The unitholders of the US oil royalty trust, BPT, aren’t overly worried about current oil prices, as shown by their unwillingness to sell as prices that track downward spot oil price movements.
Canadian Oil Sands (COSWF.PK) tracks spot oil fairly closely.
Energy funds aren’t particularly well correlated with oil spot prices.
The oil futures ETF and ETN (USO and OIL) have charts shaped like spot oil, but they underperform.
Conclusion:
If you expect oil to go to higher prices (such as the approximate $70+ often cited as “fair value” in terms of finding and lifting costs for replacement oil), then you would be best suited to own something that tracks oil closely.
If you can earn dividends while you wait, that would be better.
We would like to own BPT, because it is fractional ownership of oil wells without other business activity risks, but we’d like to see the price lower.
We do own some Canadian Oil Sands, but Canadian tax laws are forcing trusts to change structure, and we are a bit uncomfortable with the uncertainties around all that. Nonetheless, we will be buying some additional units.
Coal, which powers 1/2 of our electric production, tracks oil nicely, making companies such as BTU potentially attractive oil plays, as well as electrical plays. If coal liquifaction gains traction, it could power both our future Chevy Volt and our antique Oldsmobile 442.
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This article has 19 comments:
The list of securities in the article is not rerpesented as comprehensive. It covers principally industry groups and a few individual securities of particular interest to us for the purpose being discussed in the article. We find the trusts we mentioned more attractive for the purpose than the ones you mentioned.
I could give you an even longer list of securities not included.
If the securities you name are of particular interest to you, this is the place to present what you know about them and discuss them.
For comprehensive coverage of royalty trusts, you might read articles by and visit the website of Kurt Wulf (McDep.com)
DOM A VERY GOOD ONE TO BUY AND HOLD I RATE DOM AND BPT VERY HIGHLY BUY MORE
Could you advise us of the depletion rate on BPT, and when will investors start fleeing this high dividend provider as a result?
The 1.1 million cubic yards of toxic coal fly ash sludge containing arsenic and heavy metals and maybe some radiation spilled into the Emory River and Watts Bar lake at the Kingston, TN Steam Plant may give coal investors pause for awhile , but I suspect it will pass as it always has in the past. What's a few million cubic yards of toxic waste spilled into your drinking water and farms here and there?
A great article and much appreciated.
Steel production is also a ways from recovery..that's not positive for coal either..Oil sands are anethema to Canadian environmentalists because of water issues..use and pollution...
My take..stick to demestic safe haven producers of oil and gas (which is typically regional anyway)...LGCY..LINE..... PWE and ERF (which is taking immediate steps to reduce distributions to preserve capital)..Good luck to all!
On Dec 30 07:17 AM QVM Group wrote:
> Whisperonthewind:
>
> The list of securities in the article is not rerpesented as comprehensive.
> It covers principally industry groups and a few individual securities
> of particular interest to us for the purpose being discussed in the
> article. We find the trusts we mentioned more attractive for the
> purpose than the ones you mentioned.
>
> I could give you an even longer list of securities not included.
>
>
> If the securities you name are of particular interest to you, this
> is the place to present what you know about them and discuss them.
>
>
> For comprehensive coverage of royalty trusts, you might read articles
> by and visit the website of Kurt Wulf (McDep.com)
The poor performance of alternative energy is due to high PE's being applied to what should basically be a low-PE utility. They were thought to be technology companies, but were not because building power plants is much slower and more difficult than copying software. Too bad they still aren't affordable, but at least they are getting funding.
On Dec 30 06:53 PM User 328364 wrote:
> Can anyone explain why USO and OIL underperform crude futures so
> significantly and systemically? The underperformance seems to be
> too large to be explained by the administrative costs. I had thought
> these would be the best way to bet on a oil price increase but based
> on this article, I seem to have been wrong.
The updated number is 5.4 million cubic yards of toxic fly ash sludge containing barium, lead, arsenic, mercury, and other heavy metals. An additional 4 million cubic yards remain at the site. All in all, in liquid form, this translates into 1.9 BILLION GAllONS of total toxic waste, "so far".
Updates can be viewed at Knoxnews.com , article(s): "TVA Sludge Spill," etc.
Sorry that acknowledgment of this news offends some readers/ investors, but I am sure that other readers /investors appreciate the truth as it it is revealed to us. It is usually better to know what is happening , than not to know.
I am also concerned about the Canadian taxes, but am in a wait and see mode about how they will work, and how Canadian Oil Sands in particular will restructure as a consequence of the taxes. If the situation will be adverse, the market would probably phase in negative price consequences before the effective date of tax changes. It will also be necessary to weigh the extraordinary long-life reserves in the value equation. There is no question that the Canadian government will take a larger piece of the pie. It's just a matter of whether the remaining piece will be attractive. The US trusts are shorter reserve life.
He goes on to laud " demestic safe haven producers of oil and gas....naming them in this order, LGCY, LINE, PWE and ERF. Unless Canada has been annexed, neither PWE or ERF are DOMESTIC.
Oh yes, you sure know how to do research.
Here is an interesting article explaining why this is so. It does a much better job than I could.
seekingalpha.com/artic...
Although I don't fully understand the details, I think I understand enough to realize that USO is not such a great way to invest in oil, and OIL is even worse because of the third party risk of the issuer (in this case Barclay's Bank) defaulting. In that case, holders of the OIL would become a creditor in the bankruptcy.
But this article provides some interesting alternatives.
On Dec 30 06:53 PM User 328364 wrote:
> Can anyone explain why USO and OIL underperform crude futures so
> significantly and systemically? The underperformance seems to be
> too large to be explained by the administrative costs. I had thought
> these would be the best way to bet on a oil price increase but based
> on this article, I seem to have been wrong.