Commodities such as oil, food and gold will unfortunately go much higher in the wake of the Fed's QE3 decision. I can't help but think of the law of unintended consequences here as the Fed, in an attempt to have a positive impact on the labor market, inflicts significant pain on the lower middle class and retirees by causing a significant jump in commodity prices while in retirees' case keeping the rates they receive on interest absurdly low.
When researching this article I looked at ways to take advantage of the coming increase in commodity prices while perhaps generating some income as well. BP Prudhoe Bay Royalty Trust (NYSE:BPT) came upon my radar screen and I came away impressed with the opportunity it currently presents investors.
"BP Prudhoe Bay Royalty Trust (the Trust) is a grantor trust. The Trust was formed for the purpose of owning and administering an overriding royalty interest (the Royalty Interest). The Royalty Interest is a non-operational interest in minerals. The Royalty Interest represents the right to receive a per barrel royalty (the Per Barrel Royalty) of 16.4246% on the lesser of the first 90,000 barrels of the average actual daily net production of oil and condensate per quarter or the average actual daily net production of oil and condensate per quarter from BP Exploration (Alaska) Inc. (BP Alaska) working interest as of February 28, 1989 in the Prudhoe Bay field, located on the North Slope of Alaska. The Prudhoe Bay field is one of four contiguous North Slope oil fields that are operated by BP Alaska, Prudhoe Bay Unit. Standard Oil and BP Alaska are indirect wholly owned subsidiaries of BP p.l.c. (NYSE:BP)." (Business info provided by Charles Schwab.com).
The key for this investment is the price of oil as that is the determining factor as to what the trust will payout in terms of dividends. Please click this link to see historical quarterly dividend payments. As the price of oil has climbed, the yearly dividend paid out has risen from $6.01 in 2009 to $9.4 per share in 2011. With QE3 now firmly in place, I believe the path of least resistance for oil is higher, which will generate a higher dividend payout in the trust.
Chart courtesy of Bigcharts.com
Some key points to consider when looking at the trust: As we can see from the chart above the trust will trade in tandem with the price of oil. If oil heads lower from here the dividend rate will lower along with the equity price of the trust. The inverse is also true as well. The trusts dividend rate is treated as ordinary income so it would be wise to purchase in some sort of non-taxable account.
In summary BPT provides a unique way to profit on the coming rise in the price of oil. I am long the shares and intend to hold until 2015, when QE will supposedly cease. I believe the U.S. dollar will remain weak in this sort of environment allowing for continued gains in the price of commodities. If the price of oil does indeed behave as I expect it to, some significant capital gains may also be attained. Thank you for reading and I look forward to your comments.