Plunging Oil-When to Bite?

[Professor Disorientation]

There is a part of me that is a value investor. What about USO and XLE at these levels? I don't like to go all in because the price could drop even lower. Therefore, I may take a 50% position and then wait to see it they go lower or stabilize.

[Alanw]

Oil, being a finite resource will undoubtedly....errr probably....errr maybe go up in value in the future. Whether that is next month, next year or 20 years from now is the question. I do like XLE for an energy investment but not USO. Maybe dollar cost average with 1/4 now and every month or two after. A very interesting and unforeseen development. Another great example of why we can't predict the future.

[goldfinger]

UGA has a much better record of tracking the retail gasoline price than USO.

[MediumTex]

Buy a small independent producer like EXXI that has decent hedges in place against short to medium term oil price declines if you want to bet on a rebound in the price of oil in the next 1-2 years.

IMHO, the potential return on that trade is much better than messing around with the commodity ETFs.

I think that Saudi Arabia is setting up for a 3-4 year period of low oil prices ($30-$60 per barrel), to be followed by 5+ years of $100 or more oil (and ideally in this view $100 would be the new floor going forward).  It will be painful for the state oil companies, but it will completely wipe out all of the highly leveraged small producers around the world whose business model requires $80+ per barrel to make money.

[jabba]

I cannot help myself and am averaging in on that falling knife, it is embedded in my hand but the more it falls and the more scary it seems i have to push the buy button. Will let you know in a couple of years how i have done.

[ngcpa]

      I think the way to go is to buy the 3 U.S. majors - XOM, CVX & COP.  I might have been early, but I recently
bought all 3.  If they drop further,  I will buy more.  On average, they have yields of about 4% and low payout
ratios.  XOM has the lowest yield (3%), but is the best of the 3.  All 3 also have very high dividend growth over
a long time period (roughly 9%).  Oil prices could stay low for a pretty long time without fear of a dividend
cut.  I also think when the smaller firms go under, they will be able to buy them on the cheap.  None of them
have cut their dividends during previous oil price drops.  I will  be getting 2 x the ten year rate in yield and about
3 x the inflation rate in dividend growth.  If need be, I could wait for the price to recover while reinvesting my
dividends at low prices.
Norm 

[jabba]

Something that bothers me about the majors is that the price of oil has fallen 50% but their share prices have budged about 10%. I personally think there is more to be made in the producers with a good mark cap but have fallen 50% or more.

[barrett]

I think that Saudi Arabia is setting up for a 3-4 year period of low oil prices ($30-$60 per barrel), to be followed by 5+ years of $100 or more oil (and ideally in this view $100 would be the new floor going forward).  It will be painful for the state oil companies, but it will completely wipe out all of the highly leveraged small producers around the world whose business model requires $80+ per barrel to make money.

MT, is this your prediction or just one possible way this could play out? In other words, from your point of view is Saudi Arabia deliberately trying to wipe out the small producers?

Something that bothers me about the majors is that the price of oil has fallen 50% but their share prices have budged about 10%.

Right. The stock prices should have fallen further unless people are just holding onto them for their dividends. At least that is how it seems to me.

[ochotona]

The full story is I work in oilfield services, ironically I just got a big $Company stock award based on prior work, but the share price is depressed so I haven't sold yet. But I have a stop-limit order so it doesn't go below what I got it for. If it starts plunging again, I'll settle for that value and not be greedy. I really just want to convert it into other things, including gold. Buying UWTI was a mistake, I bought at least 30 days too early, it's too volatile even for me, and I've got a pretty tough constitution for that sort of thing (I was buying stocks in Q1 2009). I really can't want to get out. If I get out at break-even, so be it. I'll even take a loss and harvest the tax loss at the end of 2015 if it hasn't gone back to my starting point.

But yes, I would buy some $XLE. Most definitely. I think anytime in the first half of 2016 would be good.

[Mark Leavy]

The full story is I work in oilfield services,

In whatever way you can, move your net worth away from your job.
Unless your net worth is a business that you completely control.

[ochotona]

The stop-limit order on $Company stock is the firewall. This will all be over soon, one way or another...

[Mike59]

There is a part of me that is a value investor. What about USO and XLE at these levels? I don't like to go all in because the price could drop even lower. Therefore, I may take a 50% position and then wait to see it they go lower or stabilize.

Not sure if you're a purist-value investor or not, but I question if commodities and value investing can be used in the same sentence? Most purists would argue you can't accurately determine the value of a commodity and it can remain depressed for a long period of time. Even worse they can remain irrational longer than you can stay solvent.


I thought I was smart for buying gold stocks between 2012-14, and they kept falling and falling and falling, I averaged down and they kept falling and falling. I swore the technicals were suggesting a crossover and the bull was going to start running, then it broke lower. I thankfully threw in the towel and got out with my shirt, only to watch the HUI fall another 30+ % from where I got out . I'm not doing that again!

[ochotona]

If oilfield services rachets down 5% more, my circuit breaker will blow, and I'm done. Time to move on. Hey, it was a bonus stock award, my cost basis was $0. I shouldn't get greedy over a gift.

[ochotona]

Now is a good time to buy energy stocks. The next 30 - 90 days.

[hoost]

I'll agree with this.

[ochotona]

I can tell you from personal experience, morale within these companies is completely in tatters. Managers have completely capitulated. They see no future in their own industry. They are in a fetal position in their offices crying. They have possibly oversold, they have possibly overcorrected on the downside. It's human nature, and unavoidable. Dollar cost average into XLE for the rest of 2015, in nine equal chunks. Relative to the SP500, you will not be disappointed. If you take 8% of your broad market holdings (I used SCHB) holdings and put them into SP500, that will double-weight energy.

I was laid-off a week ago; I have multiple part-time consulting offers in petroleum engineering. The oil industry is not dead, it is only trying to reboot itself and stage for future growth. Be on the train when it leaves the station.


"Barton Smith, professor emeritus of economics at the University of Houston and a longtime student of the local jobs scene, said the {Houston} region should expect to lose at least 20,000 energy jobs by year's end.... Smith sees these companies' jettisoning of some of their best and most experienced employees {ahem... that would be me} as further evidence that the industry doesn't view the current slump as temporary but the consequence of an excess global supply that will persist for a long time to come."
                                                                                              L.M. Sixel, Houston Chronicle 3/28/15

[MachineGhost]

It'll take about 3-5 years for the oil supply glut to be worked out of the system.  There's nothing new here.  It's the same old boom-bust commodity cycle.  Each time, only the cause changes.  In the current case, it is a lack of storage supply.

Obama could make the problem go away in an instant by allowing export of oil.  Will he?

[ochotona]

No. Chicago Machine Politics. Reward your friends, punish your enemies. Texas is his enemy. NASA in Houston did not get any of the actual space shuttles, even though Houstonians died on two shuttle missions.

Obama could make the problem go away in an instant by allowing export of oil.  Will he?

[dragoncar]

It'll take about 3-5 years for the oil supply glut to be worked out of the system.  There's nothing new here.  It's the same old boom-bust commodity cycle.  Each time, only the cause changes.  In the current case, it is a lack of storage supply.

Obama could make the problem go away in an instant by allowing export of oil.  Will he?

"Problem"

[moda0306]

Tenn,

You're turning in to Gumby. Nice work. Keep it up.