How would you bet on rising oil prices?

[Sjalabais]

There's a couple of oil discussions here already, but none quite what I'm looking for: Assuming oil prices will rise again, how would you join in on the windfall?

Buying oil giant's stocks outright? Investing in suppliers? Oil index funds?

Some of the big few pay very handsome dividends, and haven't lost crazy much value. The smaller Statoil is down 50% from a stupid high valuation, picking up massive loans to be able to afford paying dividends.

I'm expected prices to rise also in the medium term - it would be nice to jump in on that.

[bobechs]

And you have confidence oil (and gas- they tend to be linked at the E&P and corporate levels both) prices will rise significantly in the medium term (which I'll define for you as the next one to three years) exactly..... why?

[Roboturner]

And you have confidence oil (and gas- they tend to be linked at the E&P and corporate levels both) prices will rise significantly in the medium term (which I'll define for you as the next one to three years) exactly..... why?

Come on Iran/SA conflict escalation! daddy needs a new pair of $100+ oil

[BTDretire]

This would be a huge speculation and not something I'm doing.
It also may not be the right time to do it. Also, more due diligence is due, and few more companies should be added. Iran oil will be coming on the market. It is speculative because some of these oil companies may go bankrupt, will they last two years? You would at least have your money back!
 Oil company bonds are paying 55% plus, retire on $100,000.
These bonds issued at about $100, are now at $17 to $24, if and when redeemed you get the $100 plus the interest until redeemed.
Ok, facepunch expected.
But I find it an interesting play.

A. VNR 7.875% maturing on 4/1/2020 at 26.8. CUSIP 92205CAA1         57.38%

B. BBEP 7.875% maturing on 4/15/2022 at 20, CUSIP 106777AD7         55.3%

C. ARP 7.75% maturing on 1/15/2021 at 21.67, CUSIP 049296AC0        65.6%

D. REXX 8.875% maturing on 12/15/2020 at 20,40, CUSIP 761565AB6  88.0%

E. LGCY 8% maturing on 12/1/2020 at 31.6, CUSIP 52471TAB3             60.0%

[bobechs]

And you have confidence oil (and gas- they tend to be linked at the E&P and corporate levels both) prices will rise significantly in the medium term (which I'll define for you as the next one to three years) exactly..... why?

Come on Iran/SA conflict escalation! daddy needs a new pair of $100+ oil

Jeez, I was hoping reanimation of peak oil theories would be first out of the gate.

[Roboturner]

And you have confidence oil (and gas- they tend to be linked at the E&P and corporate levels both) prices will rise significantly in the medium term (which I'll define for you as the next one to three years) exactly..... why?

Come on Iran/SA conflict escalation! daddy needs a new pair of $100+ oil

Jeez, I was hoping reanimation of peak oil theories would be first out of the gate.

I suppose... if you take "peak oil" to be nothing more than market-constrained

[Roboturner]

I have no doubt at all that oil will reach $100+ again, not sure when, but it will happen, then later it will drop to $30 again and we will see-saw back and forth for eternity - cyclical as always

[JumpInTheFIRE]

I think the question is "What information do you have that professional commodities traders don't have?".  Sure, oil is likely to go up from today's prices but nobody knows when that will happen.  You could easily lose a ton of money betting the wrong way on this.  According to http://money.cnn.com/2016/01/13/investing/oil-prices-10-dollars-standard-chartered/, oil could reach $10 a barrel.  If you are betting on it going up and it goes down that far, you could realize a substantial loss. 

This is just market timing, and if you don't have more information that anyone else on the pricing of oil then it is more likely you will lose money rather than gaining.  It's nothing but gambling.  Sure, you could come out ahead but you also might come out ahead if you bet the money you plan to invest on a roulette wheel.

[Roboturner]

that's only if you bet on prices, if you invest in companies, for example Schlumberger/Halliburton/other service companies, you could ride the wave of higher oil as things pick up again.

[Optimiser]

If you want to bet on the price of oil, USO is an ETF that tracks the price of oil.

[bacchi]

Buy the light crude Dec 2019 future. It's going for ~$45 right now.

[Indexer]

Will oil hit $100 a barrel again?  Probably, eventually. It is a commodity. Inflation alone should get it there.

But when?   With OPEC, Iran, Russia, shale drillers, etc. all in a race to the bottom I can't begin to speculate on the answer to this question. All the major players are afraid to lose market share, and until demand returns to a level to justify these prices I don't see any major increases in oil prices.

I think the more important question is whether oil will perform significantly better than VTSAX. When you buy just oil, or even oil companies, you are taking on more risk than in buying VTSAX. More risk to me means I need higher expected returns to justify it.

Is there the potential oil never gets to $100 again?  Sure. Solar is getting cheaper. Electric cars are becoming more popular. We are finding more ways to get natural gas. There is also the X factor of something completely new we can't even foresee right now.

[hodedofome]

There's no way to know when prices will recover. Recover they most likely will, but we have no idea when. It could literally be years, we have no clue.

Commodity ETFs are a good way to lose money. You need to buy the individual companies or energy ETFs for VERY long term holds. Like 5-10+ years, maybe longer.

Prices are showing blood in the streets, some companies are down 80%+. It's 2008 all over again for some of them. However we haven't seen the bankruptcies yet. I'd personally wait for the reorganizations to happen. Chapter 11 is gonna force these guys to stop drilling. Demand isn't gonna get us out of this hole anytime soon. It's supply that'll have to cut back. Until they are forced, drillers will keep drilling cause they have too much debt to pay off to stop.

Don't expect to buy any assets out of bankruptcy however, I read there's $100 billion waiting on the sidelines from private equity to buy up the bankrupt assets. They will get it before you do. We would just use it as a timing signal to tell us that the bottom may be near. And reorganization of debt will help some companies move forward without the huge debt burden.


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[Ursus Major]

I am not betting on rising oil prices (though I expect oil prices to go up eventually). However I've started to invest in the section to hedge against personal expenses going up in case the price of oil starts rising again. I consider oil majors the safest bet and I am invested in Exxon (XOM) and Chevron (CVX), two oil-majors that I expect to do okay even if the current price environment lasts for several years. I believe that these two are among the safest investements, with XOM being even safer than CVX.

So no bets here, just a hedge. If oil  doesn't go up,  I'll still do okay. If oil rises, I get some extra money to pay for gasoline and heating.

[Retire-Canada]

Will oil hit $100 a barrel again?  Probably, eventually. It is a commodity. Inflation alone should get it there.

It's irrelevant if inflation gets $20/barrel to $100/barrel as any benefit would be eaten up by the same inflation.

[Sjalabais]

This is a speculative bet, of course, but the middle east remains a combustible mess, with Saudi-Arabia and Iran readying for leadership changes - never easy in totalitarian countries. Investment is falling rapidly everywhere. Oil prices are not rational at all. Several mention the credit crunch, and it is easy to forget how quick and turbulent both the fall and rise of prices have been. How quickly can fracking fill the void? Western perceptions play a big role, and with solar power and electric cars, everyone assumes demand for oil will fall. But, as a matter of fact, most cars sold are still burning fossil fuel. The errant nature of renewables creates demand for quick power, that is coal, gas and oil power plants. The need for oil is not going away.

That's why I think now is a historical chance to invest. I don't know, but why not take a bet?

How does the USO ETF work?

[pumpkinlantern]

Oil will eventually recover.  The question is how long and how bad will it get before it does.  The problem is that before it recovers, companies may not be able to stay solvent and you might not be able to stay solvent (or patient).

You need to be able to wait it out, even if that takes 10 years.  If you are okay with this, then you should invest in companies that (1) can survive the long and ugly downturn (great balance sheet, large companies), (2) can actually capitalize during the downturn (by buying up great assets at low prices, and (3) can make money to sustain themselves during the downturn (integrated oil companies which have a significant refinery component to their business, that actually does well with cheap oil prices).

Essentially, that leaves you with the big oil majors.  These include the big four: Exxon, Chevron, Royal Dutch Shell, and BP.  There are a few others, like ConocoPhillips, etc.

[Sjalabais]

Agreed. The basic idea of conservative investment in solid companies, which are said to give better returns for patient investments anyway, is true for this kind of speculation, too.

[acanthurus]

I work in the industry, and I've been telling friends who ask me this question for the last year the same thing: DON'T.

If you insist, stick with VDE, or buy individual stocks like XOM, COP, and SLB (basically best-of-breed companies that will survive).

A little extra VDE and some of the better companies in the industry would be the only reasonably good investments. Get any fancier and you're just the dumb money.

Also, my personal dumb money pick is CRR. But you might do better with lotto tickets.

[Sjalabais]

One in five here in Hordaland, Norway, works in the oil or related industries - it's a slaughter right now.

But why don't you believe in a rebound within a reasonable amount of time?

[BTDretire]

I have a nephew (chemical engineer) that works for a major oil company.
He invested a large amount of money in oil over the last couple years.
A couple months ago he said he was down over $300K,
 I'm sure it's much worse now.
 Ouch!
           

[MustacheAndaHalf]

I think people who use words like "recovery" and "rebound" are ignorant of OPEC's power.  Until OPEC decides oil should recover, it won't.  Oil is not a free market, but a market controlled by large oil producing countries that band together to set prices.  Know what you're speculating against, and consider a diversified fund instead of an individual company if you're set to bet against the oil cartel.

[acanthurus]

One in five here in Hordaland, Norway, works in the oil or related industries - it's a slaughter right now.

But why don't you believe in a rebound within a reasonable amount of time?

Because "rebound" and "reasonable amount of time" are vague and imprecise. A rebound over a reasonable amount of time might be oil going to $20, and back up to $35, over the next two years. There are many better things to invest in today, compared to that very real possibility.

I also don't think we've seen the worst of it. Lots of E&Ps are just getting by, lots of mom and pop service companies are cut back to the bone, everywhere I go it's all about reducing costs. No new capex, no new development, just keep everything running at minimal cost for the few jobs that are being pursued. Only the big boys have any real hope of being a good investment. When some Texas shale player needs to sell assets to pay his loans, the big boys ain't buying his marginal crap. They're buying the good plays, leaving him with the marginal crap. Then they pump at a loss just to pay the bills. They might as well be burning furniture to keep warm.

[soccerluvof4]

I have built up with the decline to about .75% of my overall portfolio in VGENX that way I am slightly overweight but dont have to pick and choose. 

[ac]

I have my monthly retirement account funds going into 

60% vanguard total bond market
20% vanguard energy mutual fund
20% vanguard health mutual fund

I figure the dollar cost averaging of the monthly input and avoiding picking single stocks will keep me from getting wiped out.

Oil's at a 12 year low, so I'm comfortable betting it'll return to much higher prices than $30/barrel.  Energy's something like 10% of my entire portfolio, so again: being wrong wont wipe me out.  Most of my liquid net worth is in vtsax, vtiax, and vtblx. 

[MustacheAndaHalf]

Oil's 12 year low doesn't make for oil stocks at a 12 year low.  Take Vanguard Energy ETF (VDE) and United States Oil (USO).  According to Google Finance:
past 3 months, USO -42% vs VDE -22%.
past 10 years, USO -87% vs VDE -4%.

What if you wait 3 years and all you get is a +22% bump?

[Sjalabais]

To me, 22% in 3 years isn't bad. I'd also assume that big oil corporations have the financial muscle to diversify.

[ac]

Oil's 12 year low doesn't make for oil stocks at a 12 year low.  Take Vanguard Energy ETF (VDE) and United States Oil (USO).  According to Google Finance:
past 3 months, USO -42% vs VDE -22%.
past 10 years, USO -87% vs VDE -4%.

What if you wait 3 years and all you get is a +22% bump?

I don't understand the link between your setup and question.  3 months -22% compared to 3 years and 22% bump? 

[mrpercentage]

The majors. Exxon is good.

If you think there will be a quick reversal then Conoco. There is too much pessimism in regards to their dividend. They might not have to cut it and if they do-- so what. They still have some of the best assets in the industry. I am hoping they don't have too. It is riskier in regards to short to mid term equity value BUT long term it is a no brainer if you can manage the pain you should buy the crap out of it. Just make sure the dividend is not the only reason. Its not an aristocrat. It wants to be one-- thats obvious but we will see if this cycle will allow it to do so. If not I expect a big dividend return as soon as they are able. I think they are good for it. So run for the hills oil haters, Im still buying.

[Frugalman19]

Do not buy USO for oil prices. The ETFs are based on oil futures. Without getting too detailed, there is something called contango, this is when the ETF is forced to buy futures contracts that are higher than the spot price of the oil on the market. Right now this means that you are pretty much guaranteed to not participate in a lot of the upside if oil goes back up.

Buy individual oil companies if youre a long term investor.

[gaja]

Living in Hordaland, Norway, most of your social security and welfare benefits depend on oil prices.  When oil is up, your taxes probably not go up, and your salary will probably increase. Also, the currency goes down when oil goes down, so everything we import gets more expensive. When oil is down, as it is now, we are seeing value of houses declining, more people are unemployed. This not only affects those working directly in oil industry and supply, but also service sector. The oil companies skipped the large christmas parties - this had a major effect on the hotels and restaurants, etc. Isn't it better to spread the risk instead of putting even more eggs into the single basket?

[I'm a red panda]

I have a nephew (chemical engineer) that works for a major oil company.
He invested a large amount of money in oil over the last couple years.
A couple months ago he said he was down over $300K,
 I'm sure it's much worse now.
 Ouch!
         

Most of my college friends are petroleum engineers. They are all praying for oil to go up again!

Assuming your nephew had a diversified portfolio, and that wasn't every cent he had, being in a position to lose $300k is a luxury a lot of people would love to have.


To answer the OP's question: I'm not going to be on rising oil. Oil is in some of the investments I have, but isn't a major part of my investment strategy. I'd be happy with it being relatively low, it makes other goods more affordable and can benefit the economy by allowing other industries to boom.

[ShoulderThingThatGoesUp]

Isn't living in Norway already a substantial bet on rising oil prices?

[spud1987]

For a pure bet on oil. I would buy call options in various oil majors like XOM, CVX, etc. This is a highly speculative move, but could pay off nicely.

I did this back in August when CVX was trading at $70. I sold when CVX bounced to $90. This ending up being my only gain from 2015! I only invested .5% of my portfolio though. The rest is tucked away in index funds.