Investing In Oil

[Reub]

Does anyone here besides me think that this is a good time to buy a leveraged oil ETF such as ERX....3X Direxion Energy Bull? I think that Iran can explode at any time and prices on energy are very depressed right now.

[AdamA]

Does anyone here besides me think that this is a good time to buy a leveraged oil ETF such as ERX....3X Direxion Energy Bull?

In my mind this is kind of like leveraging a coin toss.  

Just my opinion, but these commodity plays never seem to work out the way we think they will.  

[hoost]

I would be wary.  There has been a substantial supply increase due to shale oil in North America; some US refineries are exporting oil.  If I were to be bullish for oil, it would be due to an expectation of QE3, but it could still drop.  Another QE3 pushing up oil prices would make for a bigger bust later, as we're already over-supplied.  3x may go up fast, but it also goes down fast.  Be very careful.

Rigzone usually has some good commentary if you want to dig in a bit more.

[Alanw]

Does anyone here besides me think that this is a good time to buy a leveraged oil ETF such as ERX....3X Direxion Energy Bull? I think that Iran can explode at any time and prices on energy are very depressed right now.

I think you might be right on the price of oil; however, I don't think a 3X leveraged ETF would be the way to go. Too big a gamble.  You might try USL, DBO, or OIL.  Eventually I think you'll be right.

[MediumTex]

I love the energy sector, but as Adam noted above, it never seems to do what you think it's going to do, and things can fall a lot farther than you think is possible (look at natural gas for a recent example of this problem).

[Reub]

I believe that the Iran crisis will be coming to a head shortly and even talk about the Straits of Hormuz can have a tremendous effect on the price of oil. A small wager on a leveraged oil ETF might make a killing.

[smurff]

That "killing" could be either a positive or negative event.

[BearBones]

So the consensus is, "be wary." What would folks invest in if you were to invest in energy as a long term strategy?

[AdamA]

What would folks invest in if you were to invest in energy as a long term strategy?

So here's the thing...

You could invest in an energy ETF like XLE.  It's just that it's hard to define an investment plan for something like this.  

For example, if you buy it tomorrow and then the next day it doubles, do you get out and take profits?  What if it triples over the next month?

So you could do something like 50% XLE and 50% cash, and then use bands (75/25% or something).  This would help you take profits if you were right, but if you're wrong you could wind up rebalancing into a "black hole."  

It's also very hard for me to see any VP plan beating the PP for an extended period of time.  

I say all of this as a guy who had all kinds of silly VP plans that I initially thought I would use along with my PP.  I finally had to be honest with myself and admit that all these ideas were just glorified forms of gambling, in a very literal way.  I was constantly checking in on the "investments" and I'd get a sort of gambler's high when they did well, and a low when they didn't. 

This all became evident to me when I'd do my taxes, because I'd have to look back at all of the silly ideas I'd had.  It was kind of sobering.    I've come to discover that all they really do is complicate things.  I finally decided to just stick to the PP and to find other activities/hobbies to fill my time. 

[Alanw]

What would folks invest in if you were to invest in energy as a long term strategy?

So here's the thing...

You could invest in an energy ETF like XLE.  It's just that it's hard to define an investment plan for something like this.  

For example, if you buy it tomorrow and then the next day it doubles, do you get out and take profits?  What if it triples over the next month?

So you could do something like 50% XLE and 50% cash, and then use bands (75/25% or something).  This would help you take profits if you were right, but if you're wrong you could wind up rebalancing into a "black hole."  

It's also very hard for me to see any VP plan beating the PP for an extended period of time.  

I say all of this as a guy who had all kinds of silly VP plans that I initially thought I would use along with my PP.  I finally had to be honest with myself and admit that all these ideas were just glorified forms of gambling, in a very literal way.  I was constantly checking in on the "investments" and I'd get a sort of gambler's high when they did well, and a low when they didn't. 

This all became evident to me when I'd do my taxes, because I'd have to look back at all of the silly ideas I'd had.  It was kind of sobering.    I've come to discover that all they really do is complicate things.  I finally decided to just stick to the PP and to find other activities/hobbies to fill my time. 

Amen!

[BearBones]

So here's the thing...

You could invest in an energy ETF like XLE.  It's just that it's hard to define an investment plan for something like this...

It's also very hard for me to see any VP plan beating the PP for an extended period of time.

A VP could certainly trounce the PP, IMO, just as many heavily stock weighted portfolios might. Just less "fail safe," so it is for money that one can afford to lose.

As an investment plan, how about XLE maintained as x% of the VP? Any other ideas?

I'm not wedded to this. However, in keeping with this tread, I find if probable that energy is going to become increasingly expensive over the next few decades.

[MediumTex]

So the consensus is, "be wary." What would folks invest in if you were to invest in energy as a long term strategy?

EXXI is a Gulf of Mexico producer and has a good mix between oil and gas.  Its CEO John Schiller is a good all-around CEO and I think that his company is a great story and is well-managed.

EXXI is a good play on rising oil prices, eventual north American exports of natural gas, the rebound of natural gas prices, and the "shallow water ultradeep" natural gas play.

Do your own due diligence, of course, but EXXI is IMHO a good long term VP investment.  It WILL, however fluctuate a lot.

***

SGY is another company I follow and could be a candidate for a good energy investment.

[Reub]

ERX up about 6.5% this morning.

[cabronjames]

investing in gold bullion (whether physical 1 oz coin, or paper - Perth Mint Certficate, SGOL etf, GTU closed end fund, etc)
is NOT
investing in gold stocks, whether an industry index like GDX or individual company stock(s).

Going to google finance right now (Jun-6 close), I see that the 5 yr return of GLD 144.80% vs GDX 24.26%

My guesstimate is that oil would be similar to gold in this sense, that returns in the oil commodity/barrel might be very different than oil company stock.

afaict, there is no decent acceptable way for the US retail Avg Joe investor to VP speculate in oil commodity.  afaict, the ETFs like DBO are a group of futures, which are subject to contango risk, as well as market manipulation (I recall a news article where a few bank$ters like Morgan Stanley cornered a huge portion of the oil derivatives market).  Apparently there is no paper ETF that tracks the oil spot price, nothing similar to GLD/etc for gold.

This situation sucks, because the Peak Oil notion could be a great VP speculation idea.

[MediumTex]

This situation sucks, because the Peak Oil notion could be a great VP speculation idea.

Believe it or not, it was largely several years of agonizing over the ideal peak oil investment that led me to the PP in the first place.

IMHO, the key to understanding the peak oil investment thesis is to understand that peak oil can just as easily be deflationary as inflationary, and thus the simple "oil is going up because peak oil guarantees more tightness of supply in the future" narrative can be rudely disrupted by reality, as we saw in 2008 when oil went from $150 a barrel to $30 a barrel with shocking speed.

[cabronjames]

out of curiosity, MT, do you do any VP currently? If so, is any of it related to Peak Oil?

My only guesstimate VP Peak Oil idea would be to wait for both the Shiller P/E10 of the S&P500 & the target oil company stock(s) to follow to the 3rd quintile of historical P/E10 of <=17, then invest in those oil company stock(s).  The P/E10 did fall below this 17 level for some months in 2009, following the Fall 2008 financial crisis, iirc.

Currently the S&P500 P/E10 is still historically high at ~20
http://advisorperspectives.com/dshort/u ... uation.php

I have no VP myself.

[Reub]

Just to be clear, what I am suggesting is a trade, not a long term investment in oil. My time line is in days or weeks and is in my VP only. ERX ended the first day of my trade up 9.37%, not too shabby.  Now all we need is talk about Iran's nuclear program and the Straits of Hormuz possibly being blocked along with QE3 and the trade could really pop.

[Alanw]

Just to be clear, what I am suggesting is a trade, not a long term investment in oil. My time line is in days or weeks and is in my VP only. ERX ended the first day of my trade up 9.37%, not too shabby.  Now all we need is talk about Iran's nuclear program and the Straits of Hormuz possibly being blocked along with QE3 and the trade could really pop.

Congrats,
What is your exit strategy?  Just curious.

[Reub]

I'm not sure although I am waiting for some war drums on Iran and that might make me exit as soon as oil stops rising.

[Odysseusa]

Does anyone here besides me think that this is a good time to buy a leveraged oil ETF such as ERX....3X Direxion Energy Bull? I think that Iran can explode at any time and prices on energy are very depressed right now.

Personally I don't think it's time yet to long ERX.... be patient..


I have KOLD at this time.



ProShares UltraShort DJ-UBS Natural Gas ETF (KOLD)

[Storm]

Does anyone here besides me think that this is a good time to buy a leveraged oil ETF such as ERX....3X Direxion Energy Bull? I think that Iran can explode at any time and prices on energy are very depressed right now.

I just bought about $18,000 worth of ERX (and $18,000 worth of TMF to hedge it) and it is up 11% since Thursday of last week.  Of course the TMF is down 9% so it's not a huge gain yet.

I think you're absolutely right though - QE from the ECB or the Fed is bullish for oil - War with Syria or Iran is also bullish for oil.  The next couple of years should be good for this trade.

[Storm]

Here is Clacy's backtest from the other thread for an oil-stock based PP.  This is 36 months rebalanced quarterly:

4x25% (ERX/TMF/GLD/SHY):

Total Return:  140.8%
CAGR:  34%
Sharpe:  1.60
Max DD:  -11.62%

during the last 36 months rebalanced quarterly

Not bad returns considering the max drawdown is not so bad either.

In this case, I do believe that ERX serves as a nice proxy for "prosperity" as the price of oil is almost directly correlated with the "risk on" type of environment that benefits the S&P 500.

[Reub]

UWTI is also worth exploring. It is a pure crude oil play, times three. Up almost 7% today.