Economy

Oil – Time To Buy?

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Howdy everyone!

Fantastic news I just HAD to share with y’all… yours truly made the front page!

Which front page?

Personal Finance Blogs of course! The very BEST of personal finance bloggers around the world.

Seems like my post on 15 Personal Finance Habits Everyone Should Follow really resonated. Woot!

Truly, a humbling experience to be in such esteemed company.

Anyway, apart from that exciting tidbit, I’ve been doing some thinking.

Ever since I wrote the previous post a few days ago on the collapse of oil, I’ve been wondering whether maybe we should actually be buying oil?

Oil

Hm, I mean, we all know what oil is right?

The stuff that fuels our vehicles and makes the world go round.

Of course, with the global lockdowns from the Coronavirus, oil demand has fallen off a cliff.

Which explains why the price of oil has been battered from pillar to post.

“Weeeeeeee”

But the contrarian in me can’t help but wonder…

Disclaimer

Before I go on, I want to preface this post by stating that I am not an expert in oil, nor do I have decades of trading experience with oil, so please – do your own research.

I am however, an avid learner of human psychology and market behaviour…

Go on

So right now, I think we are at an interesting stage for oil and petroleum as a whole.

Given the price falls, I would argue that the risk of buying in at these levels, is arguably less than if you had bought when the market was calmer.

Because right now, we have:

  • An “unprecedented” (most overused word of 2020) health and inter-related economic crisis
  • Global lock-down
  • Zero travel
  • Widespread social distancing and isolation
  • Numerous economies in “hibernation”

So why is there less risk?

Because all of the above factors are reflected in the price.

Employees of tire shop use tires for social distancing
The only way to be safe is to wear a tyre.

You see guys, the more I dive in, the more I realize how true Ben Graham is when he said “in the short run, the market is a voting machine but in the long run, it is a weighing machine”.

Translated to real life, this means that in the short-run, the market price is a reflection of the news, rumours, half-truths and popularity contests, but in the long-run, the market price is a reflection of earnings, cash-flow, demand and profitability.

Or put in another way, what matters in the long run is the actual underlying performance and not the investing public’s fickle opinion about prospects in the short run.

Long-run

So the question I kept asking myself, over and over is whether in the long-run we will still have:

  • An “unprecedented” health crisis
  • Global lock-down
  • Zero travel
  • Widespread social distancing and isolation
  • Numerous economies in “hibernation” exacerbating an economic crisis

And the same answer pops up time and time again:

“Possibly but it is MORE likely we will see,

  • A vaccine/cure for COVID-19
  • Global lock-downs to ease
  • Travel to resume
  • Less restricted social distancing and isolation
  • Economies slowly coming out of hibernation”.

The million dollar question of course, is to what extent the recovery bounces back… but I would wager that the oil price will not remain at these levels in the long-run.

The half-million dollar question is, when is the long-run?

Your guess is as good as mine, but the longer the run is, the higher the chance of a price recovery.

Forest Gump Long Run Scene GIF | Gfycat
“That day, for no particular reason… I decided to go for a little run”.

What to do?

Should we charge out to our nearest service station and get our hands on as much oil as we can handle?

No… that would be stealing, and is frowned upon in many countries.

Rather, there are many ways to get into the oil market, here’s three…

Stocks

Risk: Medium-High

The easiest way, is to invest in those oil companies with direct exposure to the oil market.

Here in Australia, some of the names to check out would be (in order of market size) – BHP, Woodside Petroleum, Santos, Origin Energy and Oil Search.

But mind you, make sure to check out each companies financials, specifically how much cash they hold, their debt levels and profitability.

You want to be in those firms which has a robust balance sheet to ride out any future down-turns, not ones which have to keep on raising money as they teeter on the precipice of bankruptcy.

Tightrope walking gibbon. | Monkeys funny, Animal gifs, Walking gif
Don’t let them make a monkey out of you.

Oil ETFs

Risk: Medium-High

Just like investing in stock and indices ETFs, you can also invest in Oil ETFs as well.

ETFs give access to a whole range of assets, without putting all your money into individual firms.

Oil ETFs typically track the performance of oil stocks or the price of oil itself.

You can buy/sell ETFs in the same way with stocks, through your broker.

Some of the ETFs you can buy in Oz are – BetaShares Crude Oil Index ETF-Currency Hedged, Synthetic (OOO), BetaShares Global Energy Companies ETF – Currency Hedged (FUEL), VanEck Vectors Australian Resources ETF (MVR), SPDR S&P/ASX 200 Resource Fund (OZR).

Oil Futures

Risk: Bring on the pain baby!

Futures are contracts where you lock in the price of something at a future date. Come that date, you have to either buy or sell at that price.

It’s what caused all the major bruhaha in the headlines recently with negative oil prices.

If you wanted exposure to oil as a commodity in its pure form, this is the way to do it (without purchasing the actual barrels).

In Oz, you can typically get access to futures through a CFD broker like IG Markets or CMC Markets.

The two main oil futures are – West Texas Intermediate futures (US benchmark) and Brent crude futures (global benchmark).

But remember, you’re trading a contract depending on the price change of the underlying asset. This means you can profit from oil CFDs regardless of whether prices are rising (long) or falling (short).

Trading in futures is most probably the riskiest and volatile of the three.

~~~

I’ll leave you with a wonderful maxim I learnt a long time ago.

“The lower the value of a particular asset, the less risk there is with that asset. Conversely, the higher the value, the higher the risk”.

It took me ages to figure out why, then I realized, it is because the lower the value, the lower the expectations for growth… the higher the value, the higher the expectations for growth.

It’s so much easier to outperform low expectations isn’t it?

Mind.

Blown.

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2 Comments

  • Alex

    Hi Frugal Samurai,

    Cool idea. One GIANT caveat however on the futures and ETF theory – the holding cost of these instruments is ENORMOUS in a volatile or sideways market (google “contango”). They are not a simple instrument and people that do not fully understand how they work can potentially be wiped out – even if prices do eventually rise. Speculating on oil futures and ETF’s with little or no knowledge is a sure fire way to lose money, as many people have recently discovered. They are NOT a buy and hold strategy.

    • The Frugal Samurai

      Well said Alex! It’s certainly not a hunky dory kind of market for beginners to just wade into. Learnt about contango and backwardation in school… never thought I’d see contango (nay, SUPER contango) play out in real life – it’s a crazy crazy world atm. In other news, learnt more about OOO today. You’re right, scary stuff.

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