Best Investments for Rising Oil 33 comments
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It's hard to miss the long-term supply and demand pressures that will push oil prices higher. Almost every investor is aware that oil supply is getting harder to find, while oil demand from growing economies is rising. Furthermore, underinvestment in oil industry infrastructure leaves open the door for an energy shock if a global economic recovery sends demand through the roof and the oil industry has trouble delivering.
Some say that long-term dynamic is what's driven the price of oil up this spring. Benchmark crude closed Thursday at $68.81, its highest settle since early November. Others doubt that, however, and say that the recent spike has more to do with the declining value of the U.S. dollar than with the economics of oil. Barrels are priced in dollars, so as the value of dollars fall, the price per barrel will rise.
The purpose of this article is not to explore what's driving oil prices now, but rather to look at what type of oil investment is best for the eventual rise in prices for any reason. Is it best to buy an investment that tracks the price of oil, a broader energy sector tracking vehicle, the stocks of large oil companies, or the stocks of oil service companies?
To get an idea, let's compare how representatives from each of those categories fared from July 1, 2008 to February 1, 2009 as oil declined precipitously, then how those same investments fared from February 1 to Thursday's close.
From 7/1/08 to 2/1/09, here's how oil price tracking vehicles performed:
-90.9% PowerShares Oil 2x (DXO)
-65.7% PowerShares DB Oil (DBO)
-75.4% United States Oil Fund (USO)
-77.9% iPath S&P GSCI Crude Oil ETN (OIL)
-56.0% ProShares Oil 2x (UCO) [from Nov.]
From 7/1/08 to 2/1/09, here's how various energy-sector tracking vehicles performed:
-56.6% iShares Dow Jones U.S. Oil & Gas (IEO)
-49.7% Vanguard Energy ETF (VDE)
-47.9% Energy Select Sector SPDR (XLE)
-82.1% iShares S&P Global Energy (IXC)
-78.1% ProShares Dow Jones U.S. Oil & Gas 2x (DIG)
-31.0% Direxion Russell 1000 Energy 3x (ERX) [from Nov.]
From 7/1/08 to 2/1/09, here's how various oil company stocks performed:
-63.7% PetroBras (PBR)
-40.3% BP (BP)
-41.2% Royal Dutch Shell (RDS.A)
-13.4% Exxon Mobil (XOM)
-50.5% ConocoPhillips (COP)
From 7/1/08 to 2/1/09, here's how various oil service company stocks performed:
-66.2% Pride International (PDE)
-65.1% Transocean (RIG)
-24.6% TEPPCO (TPP)
-55.9% Diamond Offshore (DO)
-59.1% Noble (NE)
-71.0% National Oilwell Varco (NOV)
-66.9% Ensco International (ESV)
Now, for the rally from February's lows.
From 2/1/09 to Thursday, here's how those same oil price tracking vehicles performed:
+79.5% PowerShares Oil 2x [DXO]
+37.3% PowerShares DB Oil [DBO]
+32.5% United States Oil Fund [USO]
+31.5% iPath S&P GSCI Crude Oil ETN [OIL]
+33.1% ProShares Oil 2x [UCO] [from Nov.]
From 2/1/09 to Thursday, here's how those same energy-sector tracking vehicles performed:
+22.7% iShares Dow Jones U.S. Oil & Gas [IEO]
+16.8% Vanguard Energy ETF [VDE]
+14.4% Energy Select Sector SPDR [XLE]
+22.2% iShares S&P Global Energy [IXC]
+17.8% ProShares Dow Jones U.S. Oil & Gas 2x [DIG]
+13.7% Direxion Russell 1000 Energy 3x [ERX] [from Nov.]
From 2/1/09 to Thursday, here's how those same oil company stocks performed:
+72.8% PetroBras [PBR]
+23.7% BP [BP]
+18.6% Royal Dutch Shell [RDS.A]
-4.1% Exxon Mobil [XOM]
-1.7% ConocoPhillips [COP]
From 2/1/09 to Thursday, here's how those same oil service company stocks performed:
+60.7% Pride International [PDE]
+54.3% Transocean [RIG]
+20.7% TEPPCO [TPP]
+40.5% Diamond Offshore [DO]
+36.5% Noble [NE]
+52.4% National Oilwell Varco [NOV]
+49.2% Ensco International [ESV]
Remember all that talk about contango back in February, and the astute onlookers who said anybody dabbling in the leveraged long funds would be screwed to hang on? Nice tip that proved to be. DXO is up almost 80% since then.
Moreover, the oil price tracking vehicles that so many scoff at for failing to track precisely have been just as good as the major stocks involved. Compare the losses and rebounds of the price tracking vehicles with the oil service company stocks. They went way down and then came way back. For all the talk of contango and slippage and the uselessness of daily tracking vehicles, none of it prevented the ETFs and ETNs from doing what they were supposed to do over the medium terms involved. Remember that the next time some part-timer tries to sound wise by pointing out that the leveraged ETFs are calculated on a daily basis -- as if you didn't know that by now, and as if it means they can't work for periods beyond a single day.
For longer periods, though, against the backdrop of rising oil as demand outstrips supply, oil service company stocks look to be the place to be.
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This article has 33 comments:
On Jun 05 12:01 PM J. Crighton wrote:
> Nice article, I for still don't get why buying DXO at a low $ and
> selling higher (a month or two out) is a bad idea.
The implication here is that if one has even a marginally good sense of timing, moving between these two ETFs can make you a lot of money.
Forget about the "don't hold these overnight" argument - look at the returns and make you own call. Where else would you have been better off putting your money?
arabianmoney.net/2009/.../
what does the author hold?
On Jun 06 09:09 AM fortypercent wrote:
> i missed the authors disclosure.
> what does the author hold?
"Almost every investor is aware that oil supply is getting harder to find, while oil demand from growing economies is rising."
Well, if you are a contrarian, this is a red alarm. "Almost every investor..." is like saying "everybody knows land is finite and population is growing, so housing prices are going up forever." In addition, the author didn't really offer any evidence/data to support his statements, much less for anybody to refute, but I guess just assuming he is right is good enough? That's how you lose money, in my opinion.
"Furthermore, underinvestment in oil industry infrastructure leaves open the door for an energy shock if a global economic recovery"
Again, this guy is bringing nothing to the table...no statistics, just a headline that you can read on most any newspaper or blog...in other words, every capital market on the planet has priced this in. Nobody should risk capital (short or long) based on these platitudes alone.
"Barrels are priced in dollars, so as the value of dollars fall, the price per barrel will rise."
I understand this correlation is undeniable. But the causation is flat out erroneous. Look for this correlation at any time during the 90's...it didn't exist, and for good reason. Pricing oil higher because the dollar fell is double counting. The currency markets, prima fascia, are responsible for repricing all things on a relative basis. For instance...my house is priced in dollars, so ceterus paribus, my house is worth more because of the dollar fell? You never hear Shiller or CR talk about the dollar being a tailwind for houses. It's fundamentally no different for oil and investors are asking to get burned by assuming this is a sound fundamental reason for risking capital.
"Remember that the next time some part-timer tries to sound wise by pointing out that the leveraged ETFs are calculated on a daily basis -- as if you didn't know that by now, and as if it means they can't work for periods beyond a single day."
This author could've offered some valuable insight, but instead decided to drop ad hominems. So i will attempt to add some insight to leveraged ETFs...Going long a leveraged fund is being effectively short volatility. As volatility falls, you should do OK. But as volatility rises, your returns will indeed erode. So for example, when the VIX hit 90, people lost money hand over fist, no matter which side of the leveraged bet they were are on. In the world where VIX is 20-30, they should probably do OK. But again, doing the leveraged thing is taking on unecessary risk because it adds the fate of the VIX into your total return.
However, the author does us all a service by researching, summarizing and presenting it.
I would love to see the percentage of trades they made in oil stocks.
All those Jr. oil companies had gone up so much lately proves that.
Even those beaten to half-death baby oil companies are moving back to live. Check out WRES, GMET and so on, they are on the move.
Grab them before they become full grown again.
Premise is faulty.
"USO All the Drops and None of the Gains"
seekingalpha.com/artic...
for a well argued presentation of the long-term inadvisedness of holding USO and other commodity ETFs.
Although you might do okay for a while, the steady month-to-month loss in the rollovers is not good for your investment health. He also explains how sharp traders take advantage of the rollovers and make them worse.
USO started off at the same value as crude and is now about a third of its value.
1)Humans inhabit a tiny fraction of the earth, whereas oil production is about to peak. So your supply/demand comparison with land is erroneous.
2)Oil being priced in dollars is not comparable to your house (assuming you live in the US). When Saudi Arabia sells a barrel of oil in dollars what are their costs in?
On Jun 06 12:04 PM BrotherMaynard wrote:
> Not a very good -- these sort of platitudinous assumptions offered
> up by the author are similar to the idea that trees grow to the sky
> and its amazingly easy to see how this sort of careless temperatment
> got us into the housing mess.
>
> "Almost every investor is aware that oil supply is getting harder
> to find, while oil demand from growing economies is rising."
>
> Well, if you are a contrarian, this is a red alarm. "Almost every
> investor..." is like saying "everybody knows land is finite and population
> is growing, so housing prices are going up forever." In addition,
> the author didn't really offer any evidence/data to support his statements,
> much less for anybody to refute, but I guess just assuming he is
> right is good enough? That's how you lose money, in my opinion.
>
>
> "Furthermore, underinvestment in oil industry infrastructure leaves
> open the door for an energy shock if a global economic recovery"
>
>
> Again, this guy is bringing nothing to the table...no statistics,
> just a headline that you can read on most any newspaper or blog...in
> other words, every capital market on the planet has priced this in.
> Nobody should risk capital (short or long) based on these platitudes
> alone.
>
> "Barrels are priced in dollars, so as the value of dollars fall,
> the price per barrel will rise."
>
> I understand this correlation is undeniable. But the causation is
> flat out erroneous. Look for this correlation at any time during
> the 90's...it didn't exist, and for good reason. Pricing oil higher
> because the dollar fell is double counting. The currency markets,
> prima fascia, are responsible for repricing all things on a relative
> basis. For instance...my house is priced in dollars, so ceterus
> paribus, my house is worth more because of the dollar fell? You
> never hear Shiller or CR talk about the dollar being a tailwind for
> houses. It's fundamentally no different for oil and investors are
> asking to get burned by assuming this is a sound fundamental reason
> for risking capital.
>
> "Remember that the next time some part-timer tries to sound wise
> by pointing out that the leveraged ETFs are calculated on a daily
> basis -- as if you didn't know that by now, and as if it means they
> can't work for periods beyond a single day."
>
> This author could've offered some valuable insight, but instead decided
> to drop ad hominems. So i will attempt to add some insight to leveraged
> ETFs...Going long a leveraged fund is being effectively short volatility.
> As volatility falls, you should do OK. But as volatility rises,
> your returns will indeed erode. So for example, when the VIX hit
> 90, people lost money hand over fist, no matter which side of the
> leveraged bet they were are on. In the world where VIX is 20-30,
> they should probably do OK. But again, doing the leveraged thing
> is taking on unecessary risk because it adds the fate of the VIX
> into your total return.
>
>
>
By comparison, XOM is based in a country that resents XOM's success and leadership in the sector (blame the media and the government for this silly attitude), where the government favors plaintiff's attorneys more than corporations that satisfy basic needs, and where the government taxes XOM ruthlessly after the Kings of Torts are done with it.
CONGRESS NEEDS TO LIMIT HEDGE FUND BUYING OF OIL & GAS
Oil futures are highly speculative. ETNs expose the investor to dangerous counter-party risk. For the prudent, risk-adverse investor looking to steadily grow a portfolio, there are less riskier ways to get oil exposure.
I wrote an article about this titled: How High Will the Price of Oil Go? seekingalpha.com/artic...
"Oil being priced in dollars is not comparable to your house (assuming you live in the US). When Saudi Arabia sells a barrel of oil in dollars what are their costs in?"
Look...the currency markets are seperate from the commodities markets, fundamentally speaking.
There is no fundamental reason for the commodity/currency trade other than speculators think it is a better store of value than the dollar (or whatever currency happens to tickle everyone's fancy).
The dollar movement has nothing to do with fundamental supply and/or demand for the commodity, any more than it does any other asset on the planet.
The dollar can go all over the place, but commodity prices are ultimately a function of supply/demand, not currencies, despite their obvious correlations. Somebody must buy or sell the actual commodity to set the prices...the prices just aren't "adjusted" by a market maker.
Again, the dollar/commodity trade Its merely a speculative store of value. It is not an axiomatic price-setting mechanism like supply and demand, and therefore buying/selling commodities becuase of currency movements is more noise than signal. And if it goes on long enough, you start to get large dislocations.
seriously, though, how many 10-k's has anyone read where currency risk was hedged away by buying commodities?
It's a gold mine.
First time I ever heard of an ETF being a sham. Perhaps this is due to the fact that the fund holds & rolls futures, and this is a unique drawback to futures/derivatives based ETFs that doesn't occur in stock-based ETFs (I HOPE)
On Jun 07 10:26 AM mplaut wrote:
> See this article:
>
> "USO All the Drops and None of the Gains"
>
> seekingalpha.com/artic...
>
>
> for a well argued presentation of the long-term inadvisedness of
> holding USO and other commodity ETFs.
>
> Although you might do okay for a while, the steady month-to-month
> loss in the rollovers is not good for your investment health. He
> also explains how sharp traders take advantage of the rollovers and
> make them worse.
>
> USO started off at the same value as crude and is now about a third
> of its value.
As exchange rates go up and down....the operating costs from countries outside the USA go up and down........if the exchange of ones currency goes up 50% against the dollar while the commodity price does not.....their operating costs increase and they make a lot less profit or potentially lose money from currency exchange differences. weak dollar does affect commodity prices if the lions share of the certain commodity is produced in another country....or if the USA exports that commodity (the us dollar decreases and the purchasing power of other countries increase increasing demand for the commodity the USA produces).
On Jun 07 09:25 PM BrotherMaynard wrote:
> RE: Nelsanity
>
> "Oil being priced in dollars is not comparable to your house (assuming
> you live in the US). When Saudi Arabia sells a barrel of oil in dollars
> what are their costs in?"
>
> Look...the currency markets are seperate from the commodities markets,
> fundamentally speaking.
>
> There is no fundamental reason for the commodity/currency trade other
> than speculators think it is a better store of value than the dollar
> (or whatever currency happens to tickle everyone's fancy).
>
> The dollar movement has nothing to do with fundamental supply and/or
> demand for the commodity, any more than it does any other asset on
> the planet.
>
> The dollar can go all over the place, but commodity prices are ultimately
> a function of supply/demand, not currencies, despite their obvious
> correlations. Somebody must buy or sell the actual commodity to set
> the prices...the prices just aren't "adjusted" by a market maker.
>
>
> Again, the dollar/commodity trade Its merely a speculative store
> of value. It is not an axiomatic price-setting mechanism like supply
> and demand, and therefore buying/selling commodities becuase of currency
> movements is more noise than signal. And if it goes on long enough,
> you start to get large dislocations.
On Jun 06 01:23 AM Peter Cooper wrote:
> Time to short oil? These prices rises are completely unsustainable
> in the worst recession since the Second World War. Is this not obvious
> when you think about it, see:
> arabianmoney.net/2009/.../
mindyourpolitics.blogs...