Best of the Week
Most Popular
1. Next Financial Crisis Is Already Here! John Lewis 99% Profits CRASH - Retail Sector Collapse - Nadeem_Walayat
2.Why Is Apple Giving This Tiny Stock A $900 Million Opportunity? - James Burgess
3.Gold Price Trend Analysis - - Nadeem_Walayatt
4.The Beginning of the End of the Dollar - Richard_Mills
5.Stock Market Trend Forecast Update - - Nadeem_Walayat
6.Hindenburg Omen & Consumer Confidence: More Signs of Stock Market Trouble in 2019 - Troy_Bombardia
7.Precious Metals Sector: It’s 2013 All Over Again - P_Radomski_CFA
8.Central Banks Have Gone Rogue, Putting Us All at Risk - Ellen_Brown
9.Gold Stocks Forced Capitulation - Zeal_LLC
10.The Post Bubble Market Contraction Thesis Receives Validation - Plunger
Last 7 days
Is A Sharp Stock Market Crash Ahead? - 21st Nov 18
Have We Seen The Worst of the Gold Bubble Burst? - 21st Nov 18
The Real Price of LNG, Climate Change, Coming Fracking Environmental Disaster - 21st Nov 18
Powell and Gold between Inflation and Global Slowdown - 21st Nov 18
Why is the North American Wilderness Known for Spiritualism? - 21st Nov 18
Stock Market Buy the Dip is Dead - 20th Nov 18
Deep State Mad World - 20th Nov 18
Commodities - What Do You Need To Know? - 20th Nov 18
Precious Metals Moving In Unison For A Massive Price Advance - 20th Nov 18
Handicapping the Precious Metals Through Year-End - 20th Nov 18
Betting Markets Confirm Theresa May Safe From Tory Leadership Challenge this Week - 20th Nov 18
Rail Chaos Transpennine Express Cancels Services to Manchester Airport Whilst on the Train! - 20th Nov 18
The Giants Are Coming...Giants of The Internet! - 20th Nov 18
Gold & Silver Corrective Rally is Almost Over - 19th Nov 18
Stock Market Going Sideways - Which Direction is Next? - 19th Nov 18
Technical Analysis Points to DOW 30k Next Target - 19th Nov 18
Stock Market Consolidating in a Downtrend  - 19th Nov 18
Next Tory Leader, Prime Minister Forecast and Betting Market Odds - 18th Nov 18
The Fed's Misleading Money Supply Measures - 17th Nov 18
Stock Market Outlook: Why the Economy is Bullish for Stocks Going into 2019 - 17th Nov 18
NO DEAL HARD BrExit Tory Chaos, Theresa May Leadership Challenge - 17th Nov 18
Gold vs Several Key Investments - 17th Nov 18
GDX Gold Mining Stocks Q3 18 Fundamentals - 17th Nov 18
Is Gold Under or Overpriced? - 17th Nov 18
Active Managers are Bearish on Stocks. A Bullish Contrarian Sign - 16th Nov 18
Will The Fed Sacrifice Retirement Portfolio Values For The "Common Good"? - 16th Nov 18
BrExit War - Tory Party About to Replace Theresa May for NO DEAL BrExit - 16th Nov 18
Aspire Global Makes Significant Financial Strides - 16th Nov 18
Gold Oil and Commodities …Back to the Future ? - 16th Nov 18
Will Oil Price Crash Lead to “Contagion” for the U.S. Stock Market? - 15th Nov 18
How NOT to Be Among the MANY Stock Investors Fooled by This Market Myth - 15th Nov 18
Tory BrExit Chaos Cripples UK Economy, Wrecks Housing Market Confidence - 15th Nov 18
Stocks Could End 2018 With A Dramatic Rally - 15th Nov 18
What Could Be the Last Nail in This Stock Bull Markets Coffin - 15th Nov 18
Defensive Stock Sectors Outperforming, Just Like During the Dot-com Bubble - 15th Nov 18
Buying Your First Home? Here’s How to Save Money - 15th Nov 18
US Economy Ten Points or Ten Miles to ‘Bridge Out’? - 14th Nov 18
US Stocks: Whither from Here? - 14th Nov 18
Know exactly when to Enter&Exit trades using this... - 14th Nov 18
Understanding the Benefits of Keeping a Trading Journal - 14th Nov 18
S&P 500 Below 2,800 Again, New Downtrend or Just Correction? - 13th Nov 18
Warning: Precious Metals’ Gold and Silver Prices are about to Collapse! - 13th Nov 18
Why the End of the Longest Crude Oil Bull Market Since 2008? - 13th Nov 18
Stock Market Counter-trend Rally Reaches .618 Retracement - 13th Nov 18
How to Create the Best Website Content and Generate Organic Traffic - 13th Nov 18
Why the Stock Market Will Pullback, Rally, and Roll Into a Bear Market - 13th Nov 18
Stock Markets Around the World are Crashing. What Not to Worry About? - 12th Nov 18
Cyclical Commodities Continue to Weaken, Gold Moves in Relation - 12th Nov 18
Olympus Tough TG-5 Camera Stuck or Dead Pixels, Rubbish Video Auto Focus - 12th Nov 18
5 Things That Precede Gold Price Major Bottoms - 12th Nov 18
Big US Stocks Q3 Fundamentals - 12th Nov 18
How "Free Money" Helped Create Sizzling Housing Market & REIT Gains - 12th Nov 18
One Direction More Likely for Bitcoin Price - 12th Nov 18
The Place of HSE Software in Today's Business - 12th Nov 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

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