Author Topic: The POO thread  (Read 3613 times)

marty998

  • Walrus Stache
  • *******
  • Posts: 5712
  • Location: Sydney, Oz
The POO thread
« on: December 13, 2015, 03:30:02 AM »
No not that sort of poo, I said POO - Price Of Oil.

Quite remarkable what is happening to the POO lately. With the constituent members of the OPEC cartel seemingly unable to behave themselves and limit supply, the POO keeps dropping to a level where all producers are fast becoming unprofitable.

At what point does it become desirable to look at an Oil ETF? $30 a barrel? $25??

$30 is a staggering 80% fall peak to trough - think it got to $150 at some stage a few years back, and remarkably pundits were speculating on that price in September last year when Iraq was teetering with an increase in terrorist related violence.

In a 'carbon constrained' world the crap shoot bet is either the POO goes to the moon due to ever increasing difficulties in extracting and refining new resources, or the POO falls to zero when the fuel is rendered obsolete by emerging or cheaper technologies.

My hunch is that buying Oil under US$30 is as sure enough a wager as you are going to get. Just be prepared to put up with some volatility in the meantime.

use2betrix

  • Handlebar Stache
  • *****
  • Posts: 1011
Re: The POO thread
« Reply #1 on: December 13, 2015, 06:17:22 AM »
I don't see any actual reasoning for your hesitation.

If you had some examples why even now would be a bad time to buy, vs like VTSAX, that'd help.

mrpercentage

  • Handlebar Stache
  • *****
  • Posts: 1236
  • Location: PHX, AZ
Re: The POO thread
« Reply #2 on: December 13, 2015, 07:31:39 AM »
Hard to say Marty but a large number of smaller players look like the walking dead and they want to take your portfolio with them. I would (and do) stick with the major players. I have no urge to play the commodity itself. I think it will be easier to predict how companies will fare. What the world will do that affects oil is really hard to say. There are way too many hands in it. If you direct stock purchase the majors you actually do give them your money and when you reinvest dividends its kind of like they pay themselves. So you actually do help them operate. Just a thought.

protostache

  • Pencil Stache
  • ****
  • Posts: 866
Re: The POO thread
« Reply #3 on: December 13, 2015, 07:56:46 AM »
Like mrpercentage, I'm sticking exclusively with the majors. Specifically, the biggest ones that are most likely to survive through the trough: ExxonMobil, Chevron, and Royal Dutch Shell. They're going to gobble up the small players as things get worse, so there's no point in putting money in the little guys.

I'm also not interested in directly betting on the commodity itself. A WTI ETF is not going to pay dividends like XOM.

use2betrix

  • Handlebar Stache
  • *****
  • Posts: 1011
Re: The POO thread
« Reply #4 on: December 13, 2015, 08:32:33 AM »
Very interesting that Phillips 66 (PSX) is nearly unaffected by the oil prices in comparison to other major companies. They are the 3rd largest energy company in the US as well.

I bought individual stocks in the major players, but lately I've been dumping more into VGENX. It's a good blend with major holdings from some of the largest companies. Seems to be a bit safer and it's insanely low right now.
« Last Edit: December 13, 2015, 08:35:07 AM by Trixr606 »

protostache

  • Pencil Stache
  • ****
  • Posts: 866
Re: The POO thread
« Reply #5 on: December 13, 2015, 01:13:52 PM »
Very interesting that Phillips 66 (PSX) is nearly unaffected by the oil prices in comparison to other major companies. They are the 3rd largest energy company in the US as well.

Phillips 66 is midstream and downstream. Their COGS is the price of oil, which they transport, refine, mark up at a fixed rate, and then sell. The other oil majors have significant upstream operations which are absolutely affected by the current and near-future price because they have to start shelving projects and drastically cutting costs when it drops too low.

This is a good whitepaper (pdf) that describes price impact on the various parts of the oil stream.
« Last Edit: December 13, 2015, 01:17:13 PM by protostache »

use2betrix

  • Handlebar Stache
  • *****
  • Posts: 1011
Re: The POO thread
« Reply #6 on: December 13, 2015, 02:25:01 PM »
Very interesting that Phillips 66 (PSX) is nearly unaffected by the oil prices in comparison to other major companies. They are the 3rd largest energy company in the US as well.

Phillips 66 is midstream and downstream. Their COGS is the price of oil, which they transport, refine, mark up at a fixed rate, and then sell. The other oil majors have significant upstream operations which are absolutely affected by the current and near-future price because they have to start shelving projects and drastically cutting costs when it drops too low.

This is a good whitepaper (pdf) that describes price impact on the various parts of the oil stream.

Good read. I am a contractor representing one of the top 5 US energy companies right now, so I dig in a fair share when I can.
« Last Edit: December 13, 2015, 04:22:10 PM by Trixr606 »

GrOW

  • Bristles
  • ***
  • Posts: 274
    • Gringing Out Wealth
Re: The POO thread
« Reply #7 on: December 13, 2015, 02:42:41 PM »
I believe that you are correct on your theories. I am a bit less aggressive and am looking at oil companies vs oil itself. Yes they are tied to each other but I am watching for well known value investors to step in and make some sizable portion increases before I join in. Sure I won't time the bottom but that is not my style. Somewhat bottom fishing with some nice dividends to boot...my style.

sol

  • Walrus Stache
  • *******
  • Posts: 7187
  • Age: 41
  • Location: Pacific Northwest
Re: The POO thread
« Reply #8 on: December 13, 2015, 02:49:23 PM »
Aside from the impact on oilpatch ETFs, I think there's a strong case to be made that cheap oil will push up the price of VTSAX.

Historically, cheap oil is good for the economy.  It lowers transportation and production costs.  It puts spending money into the hands of poor people who buy consumer crap.  And as a side benefit restricts funding to terrorist states.  Unless you think the world economy is somehow fundamentally different now, cheap oil will promote economic growth for every sector except oil companies, and let's face it oil companies are already some of the biggest and most profitable companies in the world, they can survive on reduced profits just fine.  Everyone else benefits from their moderate misfortune.  I'm all for it.


P0IS0N

  • 5 O'Clock Shadow
  • *
  • Posts: 23
  • Age: 33
  • Location: Kuwait
Re: The POO thread
« Reply #9 on: December 13, 2015, 11:00:39 PM »
Historically, cheap oil is good for the economy.
I think it depends on the economy. Countries that are heavy dependent on oil production might disagree. When a big chunk of the GDP goes down, a lot of sectors are affected. Big companies survive, but they also need to cut their losses and you can see how many people lost their jobs in the past year and will continue to lose their job in the following. Small and even medium sized companies are even in a worse situation, especially service companies who might be left without any contracts whatsoever. So, not everyone is jumping for joy with more money to spend. You really have to look at all the ramifications of the oil crisis, they're not just limited to the oil industry itself.

Now, on the topic of investing into oil, I think it all depends on how long you're willing to wait.
I mean, there's a lot of speculation involved, my personal opinion is that the price of oil will continue to slightly decrease for the following 6 months, but it should be back to over 100$/barrel in less than 5 years. That should make an investment in crude oil future ETFs (BNO maybe) quite profitable for that time-span. Do note that I can't predict the future, so my guess is as good as any.
For long term, big oil companies are the way to go, as long as you keep it diversified (VDE), but I doubt they'll bounce back as fast as the oil price. There will be a lot of inertia, getting operations started again, bringing people back into the companies, these will be considerable expenses on their side, also taking into account that drilling costs will go up. Then, there might be other factors as well on the long term. After the Global Climate meeting, who knows what taxes might be enforced on oil producers and their products. Still, big oil companies will recover and go for big profits, and as it was mentioned, you can always count on dividends in the mean time (also, for non-US citizens investing in US stocks, don't forget the dividend tax).

marty998

  • Walrus Stache
  • *******
  • Posts: 5712
  • Location: Sydney, Oz
Re: The POO thread
« Reply #10 on: December 14, 2015, 02:34:15 AM »
Yeah I agree that a low POO is a net benefit for the economy, however in the short term sharemarkets have taken a bath. Aussie market getting hammered with several of our oil stocks, which make up a sizeable chunk of the index, being slaughtered.

I have not had a happy history researching and simulating trades on oil stocks, nor gold stocks to be honest.

Buy an oil index fund and if the POO goes from 30 to 100 you know you will make money. Buy an oil stock and you're subject to the vagaries of incompetent management stuff ups and drill wells turning up dusters.

Meanwhile, the POO went down again today.

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1213
  • Age: 38
  • Location: Texas
The POO thread
« Reply #11 on: December 14, 2015, 04:47:44 AM »
Buying an oil price ETF is throwing your money away. It's meant to be traded, not invested. Read up on how those commodity ETFs are designed. The contango will kill you in the long run and it will vastly underperform the price of the commodity itself.

The VIX is like the best performing asset class YTD. It's up like 20% or something. The ETF tracking the VIX is VXX which is down like 25% YTD. It is an extreme example but USO and VXX are designed the same and both assets are usually in contango.

Stick with the oil companies if you want oil exposure. Don't do the commodity ETFs unless the ETF holds the actual commodity like GLD.


Sent from my iPhone using Tapatalk
« Last Edit: December 14, 2015, 04:50:38 AM by hodedofome »

ShoulderThingThatGoesUp

  • Magnum Stache
  • ******
  • Posts: 2999
  • Location: Emmaus, PA
Re: The POO thread
« Reply #12 on: December 14, 2015, 05:55:38 AM »
Very interesting that Phillips 66 (PSX) is nearly unaffected by the oil prices in comparison to other major companies. They are the 3rd largest energy company in the US as well.

Phillips 66 is midstream and downstream. Their COGS is the price of oil, which they transport, refine, mark up at a fixed rate, and then sell. The other oil majors have significant upstream operations which are absolutely affected by the current and near-future price because they have to start shelving projects and drastically cutting costs when it drops too low.

This is a good whitepaper (pdf) that describes price impact on the various parts of the oil stream.

ConocoPhillips split in two several years ago, just like Marathon did, into an upstream unit (now ConocoPhillips) and mid/downstream (Phillips 66). If anybody is investing in energy industry stocks without knowing things like this I don't know what they think they are accomplishing.

powersuitrecall

  • Pencil Stache
  • ****
  • Posts: 502
  • Location: Ontario, Canada
Re: The POO thread
« Reply #13 on: December 14, 2015, 07:45:55 AM »
As a Canadian I feel that there is enough oil exposure in our economy not to warrant investing outside of a solid TSX Index ETF like VCN.  My sector-chasing days are over :)

hodedofome

  • Handlebar Stache
  • *****
  • Posts: 1213
  • Age: 38
  • Location: Texas
Re: The POO thread
« Reply #14 on: December 14, 2015, 08:44:27 AM »
Here's a quick way to see the oil futures price 'curve' for the next year:

http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html

Each month is a different expiration for an oil futures contract. You can buy one expiring in January of 2016 or you can buy one in October of 2016 or whatever. Notice that each month in the future it gets more expensive to bet on the future price of oil. It creates an upward sloping 'curve.' The current spot price of west texas intermediate is $35.66. The price of the May 2016 contract is $39.88. The price of the December 2016 contract is $43.86. For you to bet on the price of oil, you'll have to 'pay up.' Then, assuming the price of oil stays the same, that future contract will drop down to the current price of $35.66, losing you money. These ETFs are buying these contracts all the time, and as long as the future contract price is more expensive than the current price, they will have a headwind against them. The ETFs will almost always underperform the spot price of oil. Buying them for anything more than a trade of a few days to a few weeks is wasting money.