How Can I Profit from Falling Oil Prices?
January 12, 2015 1:41 PM Subscribe
Oil has fallen by more than 50% since July 2014. How can I benefit from that fall, either by:
1. Gas banking - Is there a way I can buy gas at the current low rate and use it later after prices have risen?
2. Buying stock - Either a sector fund through an investment firm like Smith Barney, or buying pieces of stocks individually like through Ameritrade or Sharebuilder?
3. Or some other way?
Or should I just buy the cheap gas and enjoy the reduction as long as it lasts?
You might be tempted to start doing some commodity trading, but don't. That game is rigged.
posted by Willie0248 at 1:52 PM on January 12, 2015
posted by Willie0248 at 1:52 PM on January 12, 2015
I'm contemplating dumping some of my 2015 Roth IRA into the Vanguard Energy Fund. Shares are down about 20-25% since November, and the two largest holdings are Exxon and Chevron. I figure it's safer than individually buying stock, and it's Vanguard so fees are low, and I like to gamble.
posted by jabes at 1:57 PM on January 12, 2015 [3 favorites]
posted by jabes at 1:57 PM on January 12, 2015 [3 favorites]
There's an argument that the recent price fall is more permanent and due to increased production from relatively inexpensive and abundant shale gas. The forces that determine the price of oil are changing. I would not count on a sudden return to the status quo just because that is where the price was for the past several years.
posted by steinwald at 2:02 PM on January 12, 2015
posted by steinwald at 2:02 PM on January 12, 2015
Oil has fallen by more than 50% since July 2014. How can I benefit from that fall, either by: 1. Gas banking - Is there a way I can buy gas at the current low rate and use it later after prices have risen? 2. Buying stock - Either a sector fund through an investment firm like Smith Barney, or buying pieces of stocks individually like through Ameritrade or Sharebuilder? 3. Or some other way? Or should I just buy the cheap gas and enjoy the reduction as long as it lasts?
Whatever profit there was to be gained from the fall is already priced into the markets. What you can do is take advantage of the soon-to-come discounts on hybrid and fuel-efficient cars that are going to be sitting on dealer lots for the next 6 months.
posted by empath at 2:03 PM on January 12, 2015 [5 favorites]
Whatever profit there was to be gained from the fall is already priced into the markets. What you can do is take advantage of the soon-to-come discounts on hybrid and fuel-efficient cars that are going to be sitting on dealer lots for the next 6 months.
posted by empath at 2:03 PM on January 12, 2015 [5 favorites]
Never, ever, try to time the market....
This is so, very deeply true. That said (full disclosure: I do credit and risk in the oil industry), see how the dollar is out of whack with the price of oil? See how most North American fracking operations are sub-prime securities funded? What this means is that there is going to be a six month window when upstream securities prices are very low until they suddenly tank. At THAT point, you buy the ones who are going to make it - the ones with the downstream connections - then wait 24 months. Global demand is not going to go down, but th next 18 months are going to be a free for all.
posted by digitalprimate at 2:07 PM on January 12, 2015 [9 favorites]
This is so, very deeply true. That said (full disclosure: I do credit and risk in the oil industry), see how the dollar is out of whack with the price of oil? See how most North American fracking operations are sub-prime securities funded? What this means is that there is going to be a six month window when upstream securities prices are very low until they suddenly tank. At THAT point, you buy the ones who are going to make it - the ones with the downstream connections - then wait 24 months. Global demand is not going to go down, but th next 18 months are going to be a free for all.
posted by digitalprimate at 2:07 PM on January 12, 2015 [9 favorites]
There is no way to retroactively profit from the fall in the price of oil.
However, if you want to bet that prices will go up in the future, there are any number of options. You could buy an ETF that tracks the price of oil (USO), or you can buy stock in any number of oil rig suppliers and/or drillers that have fallen hard and fast (assuming they survive).
So, there are plenty of options if you wish to speculate on the future price of oil. But that's all it is, speculation. You could make a lot of money doing it, or not. TINSTAAFL.
posted by eas98 at 2:09 PM on January 12, 2015 [1 favorite]
However, if you want to bet that prices will go up in the future, there are any number of options. You could buy an ETF that tracks the price of oil (USO), or you can buy stock in any number of oil rig suppliers and/or drillers that have fallen hard and fast (assuming they survive).
So, there are plenty of options if you wish to speculate on the future price of oil. But that's all it is, speculation. You could make a lot of money doing it, or not. TINSTAAFL.
posted by eas98 at 2:09 PM on January 12, 2015 [1 favorite]
...or you can buy stock in any number of oil rig suppliers and/or drillers that have fallen hard and fast (assuming they survive).
That is almost entirely due to the scandals and trials revolving around Petrobras. These problems are not going away in the next 24 months.
posted by digitalprimate at 2:12 PM on January 12, 2015
That is almost entirely due to the scandals and trials revolving around Petrobras. These problems are not going away in the next 24 months.
posted by digitalprimate at 2:12 PM on January 12, 2015
The time to act is past. However, I am profiting quite nicely from the drop in the Canadian dollar because I earn American but my remaining student debt is Canadian.
Basically, the moment the oil price drops you can bet on the currencies of the major export countries to tank. But you still need to know that the oil is dropping for reals and you just can't be sure.
There are potentially some cross-border shopping arbitrage opportunities available for things like book prices where the prices lag the currency dip.
posted by srboisvert at 2:14 PM on January 12, 2015 [1 favorite]
Basically, the moment the oil price drops you can bet on the currencies of the major export countries to tank. But you still need to know that the oil is dropping for reals and you just can't be sure.
There are potentially some cross-border shopping arbitrage opportunities available for things like book prices where the prices lag the currency dip.
posted by srboisvert at 2:14 PM on January 12, 2015 [1 favorite]
That is almost entirely due to the scandals and trials revolving around Petrobras.
Huh? That is completely not the case. The Petrobras issues are not good for off-shore drillers, but it is nowhere near being the entire cause of why drillers are down so much. Off-shore drilling is among the most expensive ways to extract oil, and therefore those operations are the hardest hit by the decline in oil prices.
Anyway, there are plenty of drilling companies and operations involved in land based fracking that are also suffering.
posted by eas98 at 2:31 PM on January 12, 2015
Huh? That is completely not the case. The Petrobras issues are not good for off-shore drillers, but it is nowhere near being the entire cause of why drillers are down so much. Off-shore drilling is among the most expensive ways to extract oil, and therefore those operations are the hardest hit by the decline in oil prices.
Anyway, there are plenty of drilling companies and operations involved in land based fracking that are also suffering.
posted by eas98 at 2:31 PM on January 12, 2015
Collective, are you talking about you personally, like at the pump? Or are you talking about "is there a way to enhance my overall net worth?"
The 2nd question is pretty disinteresting, and leads to the general "you can't time the market", etc., but the former question can be pretty fun.
If you truly believe that oil is going to be more expensive in the future, you can hedge your own gasoline consumption by buying oil futures. 6 months from now, when oil is higher, after you fill up your gasoline tank, you sell off a portion of your futures (which would have increased in value at the same levels *theoretically*)
If you're not sure if oil is going to go up or down, and you just want to lock in today's price because it looks pretty good at the pump, you can buy a combination of puts and calls, to form a collar around today's price.
The trick is to avoid transaction costs as you sell off your options! The typical broker will eat you alive as you sell, but if you buy in enough volume, anything is possible!
posted by unexpected at 2:51 PM on January 12, 2015
The 2nd question is pretty disinteresting, and leads to the general "you can't time the market", etc., but the former question can be pretty fun.
If you truly believe that oil is going to be more expensive in the future, you can hedge your own gasoline consumption by buying oil futures. 6 months from now, when oil is higher, after you fill up your gasoline tank, you sell off a portion of your futures (which would have increased in value at the same levels *theoretically*)
If you're not sure if oil is going to go up or down, and you just want to lock in today's price because it looks pretty good at the pump, you can buy a combination of puts and calls, to form a collar around today's price.
The trick is to avoid transaction costs as you sell off your options! The typical broker will eat you alive as you sell, but if you buy in enough volume, anything is possible!
posted by unexpected at 2:51 PM on January 12, 2015
The problem is that if you are talking about doing something in financial markets (stocks, futures) you are betting against smart money - most of the people in the market know at least as much (if not quite a bit more) than you do about what is likely to happen so, if that all that information about what is likely to happen in the future is already factored into the prices. You might get lucky but the odds are that you will not be any luckier (and probably less lucky) than everyone else.
The interesting question is if there is a way to make a profit off of stupid money - for example people who are now going out and buying SUVs instead of hybrids since the price of gas is sooo cheap. So, I like the idea above of closely monitoring the price of electric/cybrid cars to see if dealers start marking them down to get them to sell. That mark-down would save you money and allow you to continue to save on gas when the price goes back up.
posted by metahawk at 5:02 PM on January 12, 2015 [2 favorites]
The interesting question is if there is a way to make a profit off of stupid money - for example people who are now going out and buying SUVs instead of hybrids since the price of gas is sooo cheap. So, I like the idea above of closely monitoring the price of electric/cybrid cars to see if dealers start marking them down to get them to sell. That mark-down would save you money and allow you to continue to save on gas when the price goes back up.
posted by metahawk at 5:02 PM on January 12, 2015 [2 favorites]
1. Gas banking - Is there a way I can buy gas at the current low rate and use it later after prices have risen?
Do you live by a place like First Fuel Banks? If you buy, say, 500 gallons worth of gas right now at $1.89 and the prices go back up, you'll have a banked card of 500 gallons of gas at the cheaper price while everyone else is paying more.
posted by Elly Vortex at 5:25 PM on January 12, 2015
Do you live by a place like First Fuel Banks? If you buy, say, 500 gallons worth of gas right now at $1.89 and the prices go back up, you'll have a banked card of 500 gallons of gas at the cheaper price while everyone else is paying more.
posted by Elly Vortex at 5:25 PM on January 12, 2015
If you were to buy a stock in an oil company, you would need to look for a few things in this oil price environment:
- little or no debt
- current or future production that's been hedged by the company at a higher price than oil is currently trading at (i.e., they've locked in contracts to sell a given amount of their production at a certain price, no matter what the spot or future price of oil is). A company with a lot of hedged production may have managed oil price risk by locking into a price that, a few months ago, was only marginally profitable but now seems very lucrative because they were looking at supply/demand and bet shrewdly.
- steady, reliable production with low-risk, low-cost operations (e.g., they don't operate in jurisdictions there there is political unrest, or other threats to being able to extract the oil, or operations that are expensive like offshore drilling)
This would be taking a value approach - you're looking at the long haul and hunting for companies that have been unfairly punished by market flight from the sector. Since stocks in the oil sector are generally trading down because of falling oil prices, it's a question of looking for oil stocks that aren't in danger of collapse, and currently trade well below what they *should* be worth over the long term. But this doesn't mean a quick buck. It means doing homework and deciding on companies that will survive the downturn and will be positioned to be profitable when (if) oil prices rise again, or can tolerate a bigger fall. It may mean sitting on these stocks for years. As metahawk said, a lot of this information is already priced into these.
Or, it could mean buying an index of the sector. But again, that's long haul. It's also a question of "calling the bottom," which a lot of "smart money," as others have pointed out, is trying to do.
As jabes pointed out, there are low-cost sector ETFs you could look at that spread this risk among a bunch of companies. I provide no investment advice here, but these are the strategies available as stock investments go.
posted by mandolin conspiracy at 6:24 PM on January 12, 2015 [1 favorite]
- little or no debt
- current or future production that's been hedged by the company at a higher price than oil is currently trading at (i.e., they've locked in contracts to sell a given amount of their production at a certain price, no matter what the spot or future price of oil is). A company with a lot of hedged production may have managed oil price risk by locking into a price that, a few months ago, was only marginally profitable but now seems very lucrative because they were looking at supply/demand and bet shrewdly.
- steady, reliable production with low-risk, low-cost operations (e.g., they don't operate in jurisdictions there there is political unrest, or other threats to being able to extract the oil, or operations that are expensive like offshore drilling)
This would be taking a value approach - you're looking at the long haul and hunting for companies that have been unfairly punished by market flight from the sector. Since stocks in the oil sector are generally trading down because of falling oil prices, it's a question of looking for oil stocks that aren't in danger of collapse, and currently trade well below what they *should* be worth over the long term. But this doesn't mean a quick buck. It means doing homework and deciding on companies that will survive the downturn and will be positioned to be profitable when (if) oil prices rise again, or can tolerate a bigger fall. It may mean sitting on these stocks for years. As metahawk said, a lot of this information is already priced into these.
Or, it could mean buying an index of the sector. But again, that's long haul. It's also a question of "calling the bottom," which a lot of "smart money," as others have pointed out, is trying to do.
As jabes pointed out, there are low-cost sector ETFs you could look at that spread this risk among a bunch of companies. I provide no investment advice here, but these are the strategies available as stock investments go.
posted by mandolin conspiracy at 6:24 PM on January 12, 2015 [1 favorite]
I will say only one thing. Notice how basically everybody who has answered here is trying to pick bottoms or invest from the long side. There's nothing that says oil and energy equities can't keep going down.
posted by pravit at 8:50 PM on January 12, 2015
posted by pravit at 8:50 PM on January 12, 2015
That's also a strategy, if you want to bank on where the price of oil is going. The caveat for a short equity position, though, is that your losses could be (theoretically) unlimited if the trade goes the other way.
Puts (or calls) will get chewed up by theta the longer you hold them, and covered puts mean you have to be ok with holding the underlying equity in the end if things don't go your way.
There are also ETFs that track the inverse of things like WTI crude contracts (even if they don't track exactly, and you have to be cognizant of contract rollover dates, etc.), or that track a basket of energy stocks so you can go short via an ETF as well.
The price of gasoline, though, has its own complications, like the crack spread (tee hee) and other factors, and therefore doesn't track the crude price in the way a lot of people think it does.
Won't get into contract for difference (CFD) here, since I'm assuming the OP is from the US, and can't trade them there. Suffice it to say that short or long CFDs are a great way to lose money really fast owing to leverage and circumstances beyond your control - like OPEC easing and tightening supply, etc., and which big institutions in the market can move very quickly on before any retail investor or speculator can blink.
posted by mandolin conspiracy at 11:20 PM on January 12, 2015
Puts (or calls) will get chewed up by theta the longer you hold them, and covered puts mean you have to be ok with holding the underlying equity in the end if things don't go your way.
There are also ETFs that track the inverse of things like WTI crude contracts (even if they don't track exactly, and you have to be cognizant of contract rollover dates, etc.), or that track a basket of energy stocks so you can go short via an ETF as well.
The price of gasoline, though, has its own complications, like the crack spread (tee hee) and other factors, and therefore doesn't track the crude price in the way a lot of people think it does.
Won't get into contract for difference (CFD) here, since I'm assuming the OP is from the US, and can't trade them there. Suffice it to say that short or long CFDs are a great way to lose money really fast owing to leverage and circumstances beyond your control - like OPEC easing and tightening supply, etc., and which big institutions in the market can move very quickly on before any retail investor or speculator can blink.
posted by mandolin conspiracy at 11:20 PM on January 12, 2015
Response by poster: 17 reasons why I love Metafilter.
posted by CollectiveMind at 4:31 PM on January 13, 2015
posted by CollectiveMind at 4:31 PM on January 13, 2015
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There are also reasons to believe that the drop in crude prices are related to changes in the relationship of storage costs to new production.
posted by PMdixon at 1:50 PM on January 12, 2015 [9 favorites]