Investing in Oil

guymo

Thrugelmir wrote: »

Only in terms of recent history.

Ding ding ding! Winner!

My wife is an oil market commentator and was not long ago accused of writing scare stories when she opined that the price of oil might reach $50 a barrel. "No way it would ever get that high!"

Well, okay, it was a while ago, maybe 2004; but certainly not as long ago as you would think if you just considered inflation.

jimjames

colsten wrote: »

So what exactly are Junior Oils? I really do like to know.

Junior is the investment manager, oil is the fund. These are their others

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results?companyid=1549&tab=prices&sectorid=&tab=prices

Thrugelmir

Ryan_Futuristics wrote: »

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

Increased supply of Canadian heavy crude is adding to the Saudi's woes. They are losing control of market pricing. Cutting output won't achieve much either. As US Gulf inventories are estimated currently to be in the region of 200 million barrels. Sufficient to see prices remain at current levels until well into next summer.

In 2012 Saudi shipped in the region of 2 million barrels a day to the USA. In October 2014 this had fallen to 461,000. A fall of over 75%. Which has resulted in Saudi focusing it's attention on Europe.

There's a bigger game in play I suspect.

masonic

jimjames wrote: »

Junior is the investment manager, oil is the fund. These are their others

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results?companyid=1549&tab=prices&sectorid=&tab=prices

Isn't Marlborough the investment manager of those funds?

chewmylegoff

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.

The reason the futures price is higher is not an expectation that the commodity will rise in price, it is because at the end of the contract the person on the other side of the contract has to deliver the commodity to you (or cash settle at the spot price at expiry) and therefore in order to hedge themselves again the risk of price changes they have to hold the commodity. The price is therefore approximately the cost of buying it now plus storing it until expiry.

The fund doesn't want to receive the physical commodity so close to expiry it sells the future and buys a longer dated one. The 'loss' that you are referring to is therefore effectively the cost of the fund paying someone else to store the commodity for it (which they would have to pay themselves if they bought physical at spot instead of buying the future).

InvestInPoker

In all honesty I feel I am being a bit silly and missing something here but I also would like to invest in oil some way now at it's current cost. Hopefully to capture the full extent of any future price rise.

Given the failings of the oil etf as described I can only see a couple of ways of easily doing it from my armchair..

Funds which invest heavily in energy stocks (specifically oil companies obv) is one but they have lots of other factors that influence their share price.. I will have to look at their performance graphs against a graph of the crude price to gauge how well that will fit the bill or...

Like Ryan keeps banging on about buy a Russian fund as the oil price affects those companies so heavily but then you are basically getting an energy fund like above but with extra added political risk spice?

I dunno. The gambler in me is going to have a go at this but I also have no idea how to do it from the armchair.

IronWolf

Well I have been looking around in this sector and usually the best place for your money is in oil producers, as they are leveraged bets on the price of oil. At current valuations though they don't appear to be that attractive, they're still imo based on $80+ oil with many of them being completely worthless at $60. Downside isn't really protected imo, it seems a lot of people are betting on this being a short term decline.

My oil exposure is limited atm to a Russia tracker and an old holding of a oil driller in the North Sea.

If you were confident of an oil price increase then most pure oil producers (not vertically integrated refiners like BP) could return 100-500% in most cases if we get back over $100 a barrel.

chile_paul

Thanks all for your comments - based on your advice I'm tempted to look further into investments into some of the oil producers rather than the ETF option.

Russia is another option, but not sure how keen I am to add in the additional political risk into what is already a gamble......

jimjames

masonic wrote: »

Isn't Marlborough the investment manager of those funds?

It could be, I just picked up the manager name in the HL search.

masonic

chewmylegoff wrote: »

The reason the futures price is higher is not an expectation that the commodity will rise in price, it is because at the end of the contract the person on the other side of the contract has to deliver the commodity to you (or cash settle at the spot price at expiry) and therefore in order to hedge themselves again the risk of price changes they have to hold the commodity. The price is therefore approximately the cost of buying it now plus storing it until expiry.

The fund doesn't want to receive the physical commodity so close to expiry it sells the future and buys a longer dated one. The 'loss' that you are referring to is therefore effectively the cost of the fund paying someone else to store the commodity for it (which they would have to pay themselves if they bought physical at spot instead of buying the future).

That may be the case, but it doesn't explain why the price of the longer dated futures contract is above the current spot price. Under normal circumstances, futures contracts are in backwardation, so the futures contract is priced below the expected spot price at maturity and traders are able to roll into less expensive futures contracts - unless there is an expectation that the commodity will rise in price and the expected spot price at maturity is significantly higher than the current spot price.

In other words oil futures are in contango (which is, in essence, an expectation of rising spot prices after adjusting for the cost of storage - priced into the futures contract) and this is likely to have a more significant effect on roll yield. This is evidenced by the fact my -1% to -1.5% roll yield calculated for the diversified commodities ETF in #16 is significantly lower than the roll estimated by teepee in #19, which of the order -30%. In fact, that diversified ETF probably contains commodity futures with a wide range of roll yields, even some positive, depending on whether they are in backwardation or contango and to what extent.