In my previous posts (here, here and here), I have analyzed the fundamental parameters; demand, supply and reserves of the most important and by far the most traded commodity - Crude Oil, and recommended investing in it now, with a long term perspective. In this article I will compare the different ways to invest in crude oil:
- Oil futures contracts
- Oil ETFS and ETNS
- Shares of Major Integrated Oil Companies
- Shares of Major Oil Equipment & Services Companies
- Shares of Major Drilling & Exploration Companies
First, let us compare the historical return of the different investment instruments. The table below presents the historical price appreciation and the Compound Annual Growth Rate - CAGR, between April 01, 1983 and July 25, 2012, for the following investing instruments: oil continuous leading future contract; oil continuous future contract adjusted for rollover of the expiring contract; and the stocks of these major integrated oil companies, which also consider the dividend distribution: Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP) and BP plc (BP); and also the stocks of the major oil equipment & services companies Halliburton (HAL) and Schlumberger (SLB). I compare the data starting 1983 because this is when the first data for oil continuous contract are available from TradeStation Group, Inc., my source. The adjusted for dividends stock prices were extracted from Yahoo Finance. Oil ETFS did not yet exist in 1983, so this calculation does not take them into account.
The table clearly shows that holding stocks of major oil companies since 1983 has been very profitable with an annual compound return between 8.07% to 14.8%. Long term investment in future contracts for oil has given only return of 9.8%, even though the price of oil rose 202.8% in that period. Long term investors in futures contracts should roll over expiring contracts, and because of the contango effect, the return was only 9.8% or 0.32% annually, without taking in account trade commissions.
In order to include the oil ETF, United States Oil (USO), and the oil ETN, iPath S&P GSCI Crude Oil (OIL), which were launched in 2006, an identical study was performed on a much shorter period, from September 01, 2006 to July 25, 2012. In this study more oil companies were included: major integrated oil companies Royal Dutch Shell (RDS.B) and Total SA (TOT), major oil equipment & services company Cameron International (CAM) and major drilling & exploration companies Ensco plc (ESV) and Transocean (RIG). The results are shown in the table below.
In that period, holding shares of some companies has given a nice return and holding others has caused a loss. The best return was from holding Chevron stocks - 97.2% or 12.2% annually - and Cameron - 85.6% or 11.05% annually. The worst result was from holding Transocean stocks, a loss of 34.4%, maybe because of the Deepwater Horizon disaster. Holding the oil ETF and ETN since September 01, 2006 has also resulted in a tremendous loss: 41.7% and 48.2%. Long term investors in future contracts for WTI crude oil have not done any better, in fact they lost 33.2%, even though the price of oil rose 26.2% in that period, due to the contango effect (a comprehensive explanation about the influence of contango on long term investment in commodities can be found in my article here).
Investing in oil companies has been by far the best oil investment during the two time periods analyzed; April 01, 1983 to July 25, 2012 and September 01, 2006 to July 25, 2012. But since not all companies have shown the same results, picking the right company's stock was the key to success. Oil ETF and ETN have yielded terrible results if bought on September 01, 2006 and held until now. Oil futures contracts are excellent for trading, but because of the contango effect and rollover costs, it is less suitable for long term investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.