Buying Oil

laffer

Hi
I would like to make small investment in Oil. I am not thinking about an oil company but rather the physical commodity. Could anyone make any helpful suggestions about how to do this? I understand that Oil is dominated by US Dollars so I am concerned about a potential drop in the value of the USD which would mean that when when I come to convert my profit back I would have lost a substantial amount. Am I right in thinking this? I would ideally convery my gains in USD (if any) to AUD rather that Sterling so I guess I have to be conscious of the FX rates but would welcome any kind advice from others who might have invested in Oil?

tradetime

Essentially there are two main ways you can play the physical commodity, either buy buying crude oil futures, not the best way imho unless you are familiar with futures trading, or buy an oil ETF / ETN of which there are many. You are correct, oil is a commodity that is priced in US$ however the risk to investment is actually somewhat limited, since the commodity is only priced in US$ the price is sensitive to fluctuation in the dollar,that is to say if the dollar were to substantially decline, it is likely the price of oil would rise just based on that fact. The biggest risk to an oil investment at the moment is a condition in the market called contango where long dated futures contracts are significantly more expensive than near month contracts, so the longer you hold a position you experience an erosion of capital rolling contracts forwards.
The best product I have seen for the common investor to combat or minimize the effect of this is the United States 12 Month Oil Fund.

As an after thought I should point out a couple of things, Crude has just moved up from under $40 to over $50 this month, that's about a 25% + move that's a substantial move, be sure you fully understand both the commodity's movements, and the derivative you choose to trade it by before you put money to work. I personally have just closed all my positions in Crude as of Thursday and am considering a short position.

theGrinch

you do mean crude not cooking?

I purchased BHP and Lonmin at the start of the month and they have gone up significantly. I just buy the stocks however, its important to balance your stocks across sectors and stocks vs other assets.

laffer

tradetime wrote: »

Essentially there are two main ways you can play the physical commodity, either buy buying crude oil futures, not the best way imho unless you are familiar with futures trading, or buy an oil ETF / ETN of which there are many. You are correct, oil is a commodity that is priced in US$ however the risk to investment is actually somewhat limited, since the commodity is only priced in US$ the price is sensitive to fluctuation in the dollar,that is to say if the dollar were to substantially decline, it is likely the price of oil would rise just based on that fact. The biggest risk to an oil investment at the moment is a condition in the market called contango where long dated futures contracts are significantly more expensive than near month contracts, so the longer you hold a position you experience an erosion of capital rolling contracts forwards.
The best product I have seen for the common investor to combat or minimize the effect of this is the United States 12 Month Oil Fund.

As an after thought I should point out a couple of things, Crude has just moved up from under $40 to over $50 this month, that's about a 25% + move that's a substantial move, be sure you fully understand both the commodity's movements, and the derivative you choose to trade it by before you put money to work. I personally have just closed all my positions in Crude as of Thursday and am considering a short position.

Thanks very much for your informative post. I guess I was looking to park some extra £ I have for about a 6-12 month period so shorting may not be the best thing for me at the moment. I guess I should do a bit more research into this (is there ever enough) and you have given me some food for thought. I do wonder if OPEC is going to announce further cuts to production post G20 and so I think that now might be the best time to get in.

tradetime

laffer wrote: »

Thanks very much for your informative post. I guess I was looking to park some extra £ I have for about a 6-12 month period so shorting may not be the best thing for me at the moment. I guess I should do a bit more research into this (is there ever enough) and you have given me some food for thought. I do wonder if OPEC is going to announce further cuts to production post G20 and so I think that now might be the best time to get in.

I'd think, if we could get back to around $45, then I would be a buyer again using USL, 6 months target, you'd not be asking for too much I think to see $55 to $60, it's just we've had quite a good run in the last month, and people will likely take profits, as I have. I do believe we have seen the lows for crude in that it will not drop below $32, and I'm inclined to believe $45 is now support, followed by $40, but I personally would be surprised to see us go below $40 agin, unless there is another big shock to the system.
Shorting, is not something to be done by anyone not particularly familiar with the markets, on a risk basis, whilst I do think there is a good chance, and have bet on it by closing position, that we pull back, I still think a short play carries more risk than just standing aside, and seeing what happens.
The US "summer driving season" will start in a few months, hurricaine season begins in June, and OPEC seem to be observing their cuts fairly well.

laffer

Thanks Tradetime. So with that fund you suggested can I sell out at any time or am I bound in to 12 months? What about an ETF? Would that be a better option?

tradetime

laffer wrote: »

Thanks Tradetime. So with that fund you suggested can I sell out at any time or am I bound in to 12 months? What about an ETF? Would that be a better option?

No, USL is an ETF you can buy and sell at anytime of any day the NYSE is open.
http://www.unitedstatesoilfund.com/
The 12 month element, is that rather than invest the whole fund in the front month crude futures contract and roll the entire holding forward each month, the fund was set up to hold equally positions spread across 12 months of contracts, thus they only have to roll one twelth of the positions each month, this subsatantially reduces the negative effects of the contango.

laffer

So is the one?

http://www.h-l.co.uk/shares/security_chart/sedol/B29VF35

tradetime

laffer wrote: »

So is the one?

http://www.h-l.co.uk/shares/security_chart/sedol/B29VF35

Yes that is the one, and they are even pricing it in Sterling for you, nice find. Sorry I posted the wrong link in post #7, I have corrected it now