Best of the Week
Most Popular
1. Dollargeddon - Gold Price to Soar Above $6,000 - P_Radomski_CFA
2.Is Gold Price On Verge Of A Bottom, See For Yourself - Chris_Vermeulen
3.Dow Stock Market Trend Forecast 2018 - Nadeem_Walayat
4.Gold Price to Plunge Below $1000 - Key Factors for Gold & Silver Investors - P_Radomski_CFA
5.Why The Uranium Price Must Go Up - Richard_Mills
6.Dow Stock Market Trend Forecast 2018 - Video - Nadeem_Walayat
7.Jim Rogers on Gold, Silver, Bitcoin and Blockchain’s “Spectacular Future” - GoldCore
8.More Signs That the Stock Market Will Rally Until 2019 - Troy_Bombardia
9.It's Time for A New Economic Strategy in Turkey - Steve_H_Hanke
10.Fiat Currency Inflation, And Collapse Insurance - Raymond_Matison
Last 7 days
Gold – “Make Me Feel Good…Tell Me Anything” - 25th Sept 18
Sector Rotation Continues. Bullish for Stocks - 25th Sept 18
Whose Trillion is it Anyway? US Federal Government Shocker! - 25th Sept 18
Focus on the Stock Market’s Price Action and Ignore the Failed Hindenburg Omen - 25th Sept 18
5 Problems All Restaurant Owners Will Face - 25th Sept 18
Gold Price Trend Forecast 2018 - Video - 25th Sept 18
How the US Dollar Penalizes Emerging Asia - 24th Sep18
Stock Market Macro/Macro View: Waves and Cycles Part II - 24th Sep18
DJIA Makes New High  - 24th Sep18
Gold Price Trend Forecast 2018 - 24th Sep18
The Stock Market Has Been Exceptionally Strong this September. What’s Next for Q4 2018 - 24th Sep18
Gold / US Dollar Inverse Trend Relationship Video - 23rd Sep 18
US and Global Stocks, Commodities, Precious Metals and the ‘Anti-USD’ Trade - 23rd Sep 18
Gerald Celente Warns Fed May Bring Down the Economy, Crash Markets - 23rd Sep 18
Top 3 Side Jobs for Day Traders - 23rd Sep 18
Gold Exodus to Reverse - 22nd Sep 18
Bitcoin Trader SCAM WARNING - Peter Jones, Dragons Den Fake Facebook Ads - 22nd Sep 18
China Is Building the World’s Largest Innovation Economy - 21st Sep 18
How Can New Companies Succeed in the Overcrowded Online Gambling Market? - 21st Sep 18
Golden Sunsets in the Land of U.S. Dollar Hegemony - 20th Sep 18
5 Things to Keep in Mind When Buying a Luxury Car in Dubai - 20th Sep 18
Gold Price Seasonal Trend Analysis - Video - 20th Sep 18
The Stealth Reason Why the Stock Market Keeps On Rising - 20th Sep 18
Sheffield School Applications Crisis Eased by New Secondary Schools Places - 20th Sep 18
Precious Metals Sector: It’s 2013 All Over Again - 19th Sep 18
US Dollar Head & Shoulders Triggered. What's Next? - 19th Sep 18
Prepare for the Stock Market’s Volatility to Increase - 19th Sep 18
The Beginning of the End of the Dollar - 19th Sep 18
Land Rover Discovery Sport 'Approved Used' Bad Paint Job - Inchcape Chester - 19th Sep 18
Are Technology and FANG Stocks Bottoming? - 18th Sep 18
Predictive Trading Model Suggests Falling Stock Prices During US Elections - 18th Sep 18
Lehman Brothers Financial Collapse - Ten Years Later - 18th Sep 18
Financial Crisis Markets Reality Check Now in Progress - 18th Sep 18
Gold’s Ultimate Confirmation - 18th Sep 18
Omanization: a 20-year Process to Fight Volatile Oil Prices  - 18th Sep 18
Sheffield Best Secondary Schools Rankings and Trend Trajectory for Applications 2018 - 18th Sep 18
Gold / US Dollar Inverse Correlation - 17th Sep 18
The Apple Story - Trump Tariffs Penalize US Multinationals - 17th Sep 18
Wall Street Created Financial Crash Catastrophe Ten Years Later - 17th Sep 18
Trade Wars Are Going To Crash This Stock Market - 17th Sep 18
Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - 17th Sep 18
Financial Markets Macro/Micro View: Waves and Cycles - 17th Sep 18
Stock Market Bulls Prevail – for Now! - 17th Sep 18
GBPUSD Set to Explode Higher - 17th Sep 18
The China Threat - Global Crisis Hot Spots & Pressure Points - 17th Sep 18 - Jim_Willie_CB

Market Oracle FREE Newsletter

Trading Any Market

How to Invest in Crude Oil 2009

Commodities / Crude Oil Dec 31, 2008 - 11:00 AM GMT

By: Richard_Shaw

Commodities

Diamond Rated - Best Financial Markets Analysis ArticleOil 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 chose 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 (passive)

Vanguard Energy Fund (active)

XOM

BTU

USO (ETF)

OIL (ETN)

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) 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 (COSWF), 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.

By Richard Shaw 
http://www.qvmgroup.com

Richard Shaw leads the QVM team as President of QVM Group. Richard has extensive investment industry experience including serving on the board of directors of two large investment management companies, including Aberdeen Asset Management (listed London Stock Exchange) and as a charter investor and director of Lending Tree ( download short professional profile ). He provides portfolio design and management services to individual and corporate clients. He also edits the QVM investment blog. His writings are generally republished by SeekingAlpha and Reuters and are linked to sites such as Kiplinger and Yahoo Finance and other sites. He is a 1970 graduate of Dartmouth College.

Copyright 2006-2008 by QVM Group LLC All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Richard Shaw Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules