Bet on Oil with ETFs

Every day, it seems, the price of crude oil breaks a new record and many forecasters are calling for $200/barrel oil and $6-7/gallon gas at the pumps in the foreseeable future.

So, is it supply and demand? Or is it speculation? And how can individual investors participate?

My answer is that I believe both fundamentals and speculation are at work and that ETFs provide a perfect way for investors to place bets on oil going up, or oil going down.

Here are the basics:

• The Paris-based International Energy Agency is revising its global oil supply forecast downward as it assesses the production capacity of the world’s top oil fields. It predicts that rising demand will require 116 million barrels a day by 2030, up from 87 million today, but that current oil fields will only be able to provide 100 million barrels today, or a significant shortfall.
• Russian oil production has peaked ,which is ominous news since it is the world’s second largest exporter.
• Oil has risen 30% in two months and 80% in a year.
• The old “Seven Sisters,” the big players in the oil markets, used to be Chevron (CVX), British Petroleum (BP), Exxon, Mobil, Gulf, Shell (RDS.A) and Texaco, but today, as labeled by The Financial Times, the new “Seven Sisters” are Russia’s Gazprom (OGZPY.PK), Venezuela’s PDVSA, Saudi Aramco, Brazil’s Petrobras (PBR), CNPC of China, NIOC of Iran and Malaysia’s Petronas. As a group, they control an astonishing one third of the world’s oil and gas reserves and one third of the world’s oil production.
• Oil tanker leasing rates have tripled as Venezuela and Iran stock pile oil in tankers to restrict supply and force higher prices ahead.
• Recently, legendary oil man T. Boone Pickens riled the energy markets when he said prices would hit $150 by the end of the year because, “85 million barrels a day is all the world can produce, and the demand is 87 million. It’s just that simple.”
• China’s oil consumption has nearly doubled in 10 years with another 50% rise forecast over the next 10 years.
• Goldman Sachs recently forecast $200 oil within the next six months to two years and that would equate to $6-7 gas at the pumps.
• The United States imports 70% of its oil.
• All top exporters, including Canada, Saudi Arabia, Mexico and OPEC nations, are forecast to use more oil “in house,” leaving less for exports. Leading exporters like Mexico are even forecast to become oil importers.
• Global oil production peaked three years ago.

So, it’s very easy to make a case for rising oil prices over the next decades. The most bullish forecasts even call for a continued doubling of the price again and again in action similar to what we’ve seen over the last year.

As I said at the outset, I would think that much of this year’s rise is due to speculation; however, it’s easy to see that fundamentals point to possibly higher prices and that the markets are forecasting higher prices ahead with futures prices for 2016 recently pushing well ahead of recent spot market prices.

Investors venturing into the oil market need to be careful because volatility is the name of the game, and in spite of appealing fundamentals, the action we’re currently seeing could certainly be a bubble.

But if you want to wade in, so to speak, the options are many:

• You could invest in the stocks of oil companies which have boomed lately.
• You could invest in alternate energy sources which are likely to become more popular as the Western world figures out the size of this looming crisis.
• You could invest in shale oil, alternate sources of oil and the companies that will extract and deliver this energy.
• Or, to keep it simple, you could invest in several of the Exchange Traded Funds that pace the price of oil or oil related products and services.

Clearly, it will be interesting to watch the price action in oil and participate if you’re so inclined. I can tell you one thing for sure, and that is there will be much money made and much money lost as this explosive, potentially high risk, high reward global drama unfolds.

Disclosure: I hold long positions in DIG and USO.

Comments

[The Stockaccumulator]

The
Stockaccumulator

Good article, but a far better buy today would be PBR during this brief rare, mini-pullback in PBR...Read the below carefully researched article from "The street.com on Petroleo Brasileiro:

" (PBR - Cramer's Take - Stockpickr) shareholders have earned a 172% return on their investment over the last 52 weeks.

"If last week's positive earnings announcement is any indication, this Brazilian oil company has a lot more going for it than just good-looking charts (though the charts look good, too.)

PetroBras Returns Continue to Beat Oil and Brazil Investment Benchmarks

PetroBras boasts nearly a $300 billion market capitalization (its market cap just passed that of Microsoft(MSFT - Cramer's Take - Stockpickr)).

In fact, it now claims to be the third-largest publicly traded company in the Americas, behind Exxon Mobil(XOM - Cramer's Take - Stockpickr) and General Electric(GE - Cramer's Take - Stockpickr).

With a presence like that, it's clearly a bellwether stock both for the Latin American region and in the oil sector.

PetroBras does a lot: It explores for and produces oil and natural gas. It sells surplus production in Brazil and foreign markets. PetroBras operates oil tankers, distribution pipelines, marine, river and lake terminals, thermal power plants, fertilizer plants and petrochemical units. It is also building new pipelines for ethanol distribution and recently set up a separate operation to manage all its ethanol activities.

Here are three reasons I like PetroBras.

1. The recent oil and gas announcements are real.

In the last six months, PetroBras has discovered three super-giant oil fields in Brazil's offshore Santos Basin. The company also confirmed in January a major natural gas and condensate deposit in the Jupiter area.

If estimates of 33 billion barrels in reserve from another field (Carioca-Sugar Loaf) prove correct, then this ranks as the third-largest oil field in the world after Saudi Arabia's Ghawar (66 billion barrels) and Kuwait's Greater Burgan (46 billion barrels). "

Rudy Martin the writer ot this is the former director of research for TheStreet.com Ratings. Earlier he worked 25 years in investment research and management positions with Fidelity Investments, Lincoln National, Dean Witter Reynolds and Transamerica Investments. He began his career as a securities investment analyst at Duff and Phelps where he published equity and fixed income securities investment recommendations. Martin holds a master's degree in finance from Kellogg Northwestern University and is also a Chartered Life Underwriter. "

It is expected that PBR will have a huge number for this coming quarter's earnings announcement very shortly. Never has there been such a huge expected net profit number from any oil company, and due to the April and May record price of crude. The graphs show the accumulation going into and through each earnings announcement to be far more impressive than any other large oil/gas company... One will have to take great risk with smaller similar companies... PBR will make you money next week/month, and expect $140 by next year this time for PBR... todays $68 is a brief temporary bargain... in a week or so PBR will be back to its all time high of $78... this is a rare opportunity... research it, look at the graphs... amazing for such a large well established company that is perhaps the microsoft of oil...

I may buy 20,000 more shares of PBR today or early tommorrow...

Warmest regards... the STOCK ACCUMULATOR

[Bear Stocks Report]

You can bet on one company like PBR or for a more diversified approach pick an energy ETF like DBE, RJN or JJE.

[billp37]

"You could invest in shale oil, alternate sources of oil and the companies that will extract and deliver this energy."

Be thinking about EROEI [energy returned on energy invested].

www.prosefights.org/co...

Some alternate energy schemes may be designed to separate liberal arts graduates from their money.

www.theoildrum.com/nod...

[investor 911]

Stock accumulator...stop making an idiot of yourself appearing in every article promoting your PBR....read more interesting debacles.