Investing in Oil

Ryan_Futuristics

When it comes to commodities (over the long-run, the poorest investments in terms of risk vs return) there is only one way I'd invest:

Momentum

Look up momentum investing, it's very well researched and widely employed, and while slightly higher up the risk spectrum than buy-and-hold, is more suitable for certain asset classes and tends to return more

I've not looked up specific strategies for oil, but in essence you'd wait till the oil price is on the move upwards *before* investing, then sell when it levels off or starts to fall

You could just look at whether its price is up or down over 6 months, or use a chart and hold while the SMA 50 is above the SMA 200

Without a buy and exit strategy, I just don't find value in holding commodities

System

I came to the forum to ask the same question as the OP. Oil is starting to look very cheap now and it is not a question of if, but when it will recover.

Rather than investing in energy-rich equity funds like artemis global energy or junior oils trust I had considered buying an oil ETF (e.g. OLWP).

However I came across this US article http://www.valuewalk.com/2015/01/uso-etf-vs-oil/

After reading this I am not sure if an oil ETF is worth the risk and will even capture an upside in the oil price due to the 'futures'. Can anyone shed any light on this as I must admit I don't fully understand the 'futures' concept?

masonic

teepee83 wrote: »

After reading this I am not sure if an oil ETF is worth the risk and will even capture an upside in the oil price due to the 'futures'. Can anyone shed any light on this as I must admit I don't fully understand the 'futures' concept?

In essence, there's an expectation that oil prices will rise and that is priced into the futures contract, so the futures contract is priced above the current spot price. These funds invest in a ladder of futures contracts and as each one matures, a new contract is taken out to replace it.

So the fund continually has contracts maturing at the current spot price, which are then renewed at a price above this spot price and the difference between those two prices gives rise to lost returns. This is known as roll.

System

masonic wrote: »

In essence, there's an expectation that oil prices will rise and that is priced into the futures contract, so the futures contract is priced above the current spot price. These funds invest in a ladder of futures contracts and as each one matures, a new contract is taken out to replace it.

So the fund continually has contracts maturing at the current spot price, which are then renewed at a price above this spot price and the difference between those two prices gives rise to lost returns. This is known as roll.

Thanks Masonic, that is very helpful. Is there any way to mitigate the effect of roll or futures i.e. to trade based on the current spot price?

masonic

teepee83 wrote: »

Thanks Masonic, that is very helpful. Is there any way to mitigate the effect of roll or futures i.e. to trade based on the current spot price?

If you're willing to take delivery of some barrels of oil there is. I don't know if spreadbetting is an option here but there could be similar complications involved in that too.

When I looked into a couple of diversified commodity ETFs, the roll yield was eroding an additional 1% to 1.5% of performance from the fund per year.

tomo21217

I also would like to look at ways to invest in oil at the spot prices, with the plan to hold untill they rise.

Masonic great info there, so even an oil etf might not be the way to go.

Thrugelmir

teepee83 wrote: »

I came to the forum to ask the same question as the OP. Oil is starting to look very cheap now and it is not a question of if, but when it will recover.

Only in terms of recent history.

System

masonic wrote: »

If you're willing to take delivery of some barrels of oil there is. I don't know if spreadbetting is an option here but there could be similar complications involved in that too.

When I looked into a couple of diversified commodity ETFs, the roll yield was eroding an additional 1% to 1.5% of performance from the fund per year.

Yes tempting. not sure where I would put the barrels...!

I've just plotted a graph of the oil EFT I mentioned versus oil WTI on HL's site.
At the trough in 2008 Oil WTI was just under $34 per barrel. By Jan 2011 it had recovered to just under $114 per barrel. By comparison the unit price of the ETF was 22.85 at its trough and peaked at 38.99 at the same time. A far more modest increase. Of course the ETF has some downside protection but in the case of buying for an increase it doesn't look good value.

System

Thrugelmir wrote: »

Only in terms of recent history.

True indeed, but there is not a limitless supply, so unless we start to use other forms of energy the price will rise. In addition the oil rich middle eastern countries cannot afford for oil prices to stay this low for too long, so eventually OPEC will act...

Ryan_Futuristics

Thrugelmir wrote: »

Only in terms of recent history.

That's it

There's no reason oil has to return to previous prices - and sometimes commodities just go out of fashion or are replaced by other commodities ... Without a simple market timing rule, you'll be unlikely to buy at the right time, let alone sell at the right time

Obviously I'm expecting oil to rise ... But I think you'll see more upside from Russian equities if oil returns to $100/barrel than investing in oil alone (plus a 4-5% dividend in the meantime) - or invest directly in the Russian energy sector ... Prices could stay depressed for some while though