Some Help & Wise Council Requested on Investing In Oil

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portal202's picture
portal202
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Some Help & Wise Council Requested on Investing In Oil

Dear CM Community,

I am a novice investor but would still like to protect my current assets against the coming turmoil. I’ve read books and reviewed many websites but still haven’t found an answer to two particularly nagging questions- “How to buy barrels of Crude Oil and why isn’t buying crude oil a sound strategy”

I just want to preface the following with an acknowledgement of my ignorance and naivety. I recognize the fact that most of the people on these forums, including CM, are experts in their fields and there must be a very good reason why crude oil investment is not a sound investment strategy.

But to the novice investor who realizes the price of oil is going to rise indefinitely it would seem that buying oil would be a pretty safe bet. I looked into purchasing oil but only found oil futures indexes, oil companies or energy portfolios.

Can anyone please help me better understand why it is so difficult to invest in oil and why oil investment is not a recommended strategy.

My sincere thanks and gratitude-

John B.

Phil Williams's picture
Phil Williams
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Posts: 337
Re: Some Help & Wise Council Requested on Investing In Oil

John B.,

           I learned the hard way back in 2008 that crude may not just go up indefinitely. Don't get me wrong, I am very bullish on the price of crude going forward. My problem was that I was very well informed on the energy, and the environment side of the 3 E's, but not as much on the economy. The problem with crude is that once the price gets to a certain point it starts to crush economic activity. Most people call this demand destruction. Then you get what we had in 2008, where we had lower demand, and tons of deleveraging. The scary thing is that it did not take much demand destruction to lower the price of crude from $147 to $38 in less than a year. At this stage in the game the marginal barrel of oil is around $60-70 per barrel. This means that it is a pretty safe bet that if oil drops below this range, it will not stay there long as exploration companies cannot afford to bring on new production, and other expensive projects start to be shut down. It is much easier for an oil company to shut a project down than it is to bring one back on line.

          I am long oil in my investment portfolio, but as an aside I do consider the money I have in the stock market to be speculative, meaning that if I lose it, I will still be OK. I consider my core investments to be my home, solar panels, garden, my land, tools, PM's, storable barter items, guns, ammo, and storable food. Having said that, going back to your original question regarding investing in oil, I would love to have crude buried in huge tanks in my yard, but that is just not practical. The next best way, would be to buy futures, but you have to really know what you are doing, and the timing has to be right. We all know oil will probably be more expensive in the future, but when? Maybe we slip into a deep depression with low oil prices for 10 years, who knows? Maybe you invest in a futures contract, and you make a lot of money, but you can't settle because too many counter parties are overleveraged and can't pay. You can also of course as you mentioned buy the energy companies, but which ones? If you believe as I do that there will be less oil in the future, the oil companies will have to contract. They may make more profit because of the price of oil, but they also may have less access to oil in the future. There is a real risk of countries nationalizing the remaining oil when things really get out of hand.

           The only thing that is a sure bet is that you and your family will need a roof over your head, clothes on your back, food to eat, and water to drink. Buy the things you need first to secure these necessities well into the future before you speculate. If you are a novice investor, and you don't want to put the time into research, Steve Leeb has a "Peak Resources" portfolio that he runs. I have my some of my investments in this portfolio. The portfolio is invested based on the premise of resource scarcity, so there are fertilizer companies, oil and energy, precious metals etc... You can find him on the web at Leebcapitalmanagement.com. I personally prefer for Mr Leeb to do the speculating for me, I just don't like to worry about it. I hope this helps you.

Matthew

 

SteveS's picture
SteveS
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Re: Some Help & Wise Council Requested on Investing In Oil
portal202 wrote:

 

Can anyone please help me better understand why it is so difficult to invest in oil and why oil investment is not a recommended strategy.

My sincere thanks and gratitude-

John B.

It's a bit difficult to invest in oil directly since you can't easily store it (unlike gold).

I think you will find that smart investors would recommend oil as part of a well rounded portfolio.

On Financial Sense last week, Jim Puplava mentioned oil companies and pipeline companies as having good dividends. On the oil company side, he mentioned (without specific recommendations) Exxon and Chevron, as I recall. Jim regularly reports on the energy sector.

Another way to invest more directly in oil prices is an oil ETF, it trades like a stock. USO is a popular one (and is starting to look oversold right now).

Now, I am not an investment counselor (or even a smart investor) - do your own homework, understand exactly what you are getting into and why, and keep an eye on it.

Good luck and keep asking questions, and I welcome others to add to or correct what I've said.

 Steve

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On Our Own
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Re: Some Help & Wise Council Requested on Investing In Oil

I am not certain which you really mean:  to invest in oil as a commodity or to actually purchase a barrel of crude oil.......     

a.) oil companies are a poor bet right now,  exactly for the reasons zeroenergy gave (great assessment zero)  I too am long in oil and watch the industry closely.  There is far too much speculation in the industry to assume that any of the rules of supply and demand were at work.  Most people see that refining is really taking a hit,  but keep an eye out for those companies that are able to handle sour crude as that is what is left.  The ones who excell at sour crude will be all that is standing when the shake out is done.

b.)  crude oil itself is hard to purchase,  almost useless in its unrefined state and very difficult to store.  I would not recommend it.  Buy fuel if you wish,  but it is also hard to store without alot of effort.    In many areas it is dangerous and/or illegal to store fuels over certain amounts that are usually associated with home heating.  Anything past that can run you into trouble.

 

There are several good threads on here if you search for them on fuel and fuel storage.  Good luck and welcome aboard.

docmims's picture
docmims
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Posts: 644
Re: Some Help & Wise Council Requested on Investing In Oil

The dollar has been rising recently agains most world currencies.  This is part of the recent weakness in oil prices.  It would be easy and obvious to say that the way the Fed is printing trillions of dollars that this could not continue.  but the crazy way the world works with the dollar as the reserve currency -- the dollar could keep rising over the next year.  this would be a reason in the near term that oil prices could sink further.  However, longterm oil will rise, but speculation in oil futures is fairly risky.

portal202's picture
portal202
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Joined: Jul 18 2009
Posts: 8
Re: Some Help & Wise Council Requested on Investing In Oil

Dear Zero Energy, SteveS, On Our Own and Docmims,

Thank you very much for taking the time to provide your thoughts and opinions. I feel very lucky to have found a group of like minded people with whom to confer. I hope that i can make contributions to these forums and the community as whole in the weeks and months ahead.

I had no idea that investing in oil could be so complicated and difficult. The points raised were all valid and helped to open my eyes to the nature and inherent problems in this type of investment. After some further research i found the UBS Rogers International Commodity Index (in swiss francs which will warrent another post:). Does anyone have an opinion of this fund or a prior poor experience with similiar funds?

Best regards,

John B.

rickets's picture
rickets
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Posts: 238
Re: Some Help & Wise Council Requested on Investing In Oil

A note of caution on various vehicles to invest in oil futures.  There is an ETF:  USO, which is an attempt to track the price of crude.  The issues is that they have to roll into future months and that the further out they buy the futures, there is usually a greater premuim.  This can, and has, resulted in a decay in the performance of USO vs the actual price of crude.  (a sidenote - this decay is a similar deal to leveraged ETFs - however caused by different underlying structural issues).

In short, unless you are a professional, it is extremely hard to just bet on the price of crude going up without facing a huge headwind of either fees and/or return decay from rolling futures contracts (contango issues).  If you want oil exposure, oil companies might be a way to go - however these may only do well in "normal times."  If some of the predicted events of this site occur, the economy will be in the tank, and while oil prices may be over 100 or 200 or whatever, the oil companies might not be able to make any money as the demand will crash, and the profit margins would be squeezed.

These points are not meant to sway your decision in any way....I am only trying to provide some information.  I like the ZeroEnerg21 comments - in that one way to invest or protect against an energy shortage and/or energy price hyperinflation would be to become more self sufficient with alternative energies where your home produces more of the energy you need.

Hope this helps...and good luck.

SteveS's picture
SteveS
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Posts: 358
Re: Some Help & Wise Council Requested on Investing In Oil
rickets wrote:

A note of caution on various vehicles to invest in oil futures.  There is an ETF:  USO, which is an attempt to track the price of crude.  The issues is that they have to roll into future months and that the further out they buy the futures, there is usually a greater premuim.  This can, and has, resulted in a decay in the performance of USO vs the actual price of crude.  (a sidenote - this decay is a similar deal to leveraged ETFs - however caused by different underlying structural issues).

 

Good point I forgot to mention. I look at ETFs as short term trading vehicles. Of course these days I see just about  everything as short term!

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