Investing in Oil

Thrugelmir

masonic wrote: »

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.

As a producer why would you enter into a contract to make a guaranteed loss ? Perhaps the view is that prices will rebound to the $60 - $70 level within a short time window. Winter still lies ahead.

masonic

Thrugelmir wrote: »

As a producer why would you enter into a contract to make a guaranteed loss ? Perhaps the view is that prices will rebound to the $60 - $70 level within a short time window. Winter still lies ahead.

Well the sellers of futures contracts are effectively in a short position having sold the contract and would therefore benefit by delivering later. This creates a structure in which short dated futures contracts will trade at a higher price than long dated contracts and the latter will appreciate in value as the contract approaches expiration (where they will converge with the spot price at that time). Where the producer is not taking a short position (i.e. they are storing the commodity), there is a so called convenience yield associated with holding a product that is relatively scarce in a high demand environment.

Edit: Just to add that the above describes a situation in which the commodity price is relatively stable (i.e. not the current situation with oil). If the price falls significantly, as it has done, then existing short dated futures have factored in a higher price and therefore adjust downward instead of upward to tend towards the spot price and existing longer dated contracts end up being more expensive, which (as mentioned already) leads to a much higher cost of rolling the contract over. So commodity ETFs can offer a particularly bad deal when the commodity price suffers actual falls and/or there is an expectation of future rises.

TCA

A new 6 year low for Brent crude today. Are fund managers with large oil and gas holdings likely to trim their investments or is that too reactionary? e.g. Temple Bar Investment Trust has about 13% in BP and Shell. I wonder if they're considering longer term valuations and the continued ability of these oil giants to pay dividends?

Kendall80

Some companies took a big hit today. Afren went down 30% although there were some other concerns at play there.

My only single equity exposure (Tullow Oil) traded flat despite some intraday volatility. I have been tempted to sell and cut my losses (I am down about 9%) but the reasons I bought into that specific oil company haven't changed.

Hopefully later in the year we'll see a Quindell style turnaround. An insurance company rather than oil but its up to around 110+ from the 40 it was at when I decided 'not' to buy into it

IronWolf

Well longer term oil is toast if the world's governments climate change targets are adhered to in even the slightest. The current reserves of oil is about 5x the amount that can be used under the agreed targets.
https://investingsidekick.com/fossil-fuels-bad-investment/

We either need some new technological innovation or we'll be going gas/nuclear. Solar is quite promising though, over the last 5 years the costs of solar panels have plummeted, at this pace it could soon be a viable option.

anoncol

teepee83 wrote: »

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...

Nothing is limitless. But they've been saying its going to run out for decades now.