Oil – How you can play this game

Does trading with wide and frequent price fluctuation excite you?

Then you will be interested in trading crude oil. Such fluctuation occurs daily.

Some people ask me how to start – my first response is are you sure you want to do it? Your heart needs to be strong enough to tolerate the wide ups and downs that have every potential to give you a heart attack daily .

oildrum

Look at the following crude oil price charts and you will know what I mean

dailyoilchart
Daily Crude Oil (WTI) Price

yearlyoilchart10yrs
Yearly Crude Oil (WTI) Price, 10 years

It is definitely not for the faint heart.

balancingact

Still interested? Then read on ……

In the past, trading in Oil directly was only restricted to the big oil companies, trading houses, financial institutions, specialized traders and definitely not for us, the retail investors.

As a retail investors, the closest we can get to it within the Singapore Stock Market was to invest in companies that support the oil exploration business or run a business with its profitability heavily exposed to oil prices. Examples are Keppel Corp, Sembawang Marine, Ezion Holding, Vallianz Holding, SIA, SMRT etc.

A bit further than that, some may invest in local unit trusts that hold equities of major oil companies like Exxon Mobil, Shell, Total.

If you can venture overseas, many of the local securities companies can help us to invest directly into the US market where many of these big global companies are listed.

Trading in crude oil directly wasn’t that readily available until ETFs came into the market. We can now gain direct exposure to the price of oil through ETFs that hold oil futures contracts. As oil prices are largely uncorrelated to stock market returns, these products follow the price of oil more closely than energy stocks and thus it can serve as a hedge and a way to further diversify your investment portfolio.

I will share what I have learned 🙂

oil-drilling

Below is a list of the largest Oil related ETF according to EtfDB.com:

( Symbol : Name : Size of ETF : Price per Unit : % change on 19/5 )

  • USO : United States Oil Fund : $3,066 Mil : $10.48 : +2.1%
  • UCO : ProShares Ultra Bloomberg Crude Oil : $960 Mil : $18.35 : +4.4%
  • OIL : iPath S&P GSCI Crude Oil Total Return Index ETN : $713 Mil : $5.46 : +3.4%
  • UWT: VelocityShares 3x Long Crude Oil ETN : $528 Mil : $18.37 : +6.6%
  • DBO : PowerShares DB Oil Fund : $402 Mil : $8.70 : +1.6%
  • SCO : ProShares UltraShort Bloomberg Crude Oil : $124 Mil : $36.60 : -4.3%

As you can see above, there are many types of ETFs to choose from. There are the plain vanilla ones like the USO to leverage ETF as much 3X up like (UWT) and even one that you can use to short the Oil price (SCO). You can choose the ones that are more aligned with your beliefs in the where the oil prices are leading and also how much risk you want to take.

For example, oil price for WTI futures roses by ~ 2% last Friday. So USO also rose 2.1%. But if you have bought UWT, your holding would have increased by 6.6% as it is a 3 3X leverage ETF. If you have taken the wrong bet and bought SCO instead, your holding would have shrunk by 4.3%. As you can see, the fluctuation is wide and thus, I will repeat again that it is for people who are very adventurous and risk taking and not for the faint heart.

risk_9
Risk

So what’s the investment philosophy I use for Oil Trading?

I only trade in these oil ETFs with money that I can afford to lose completely and it may really end up that case. I am using to diversify my portfolio and also to take a “bet” based on my belief and analysis of the oil markets.

One thing to note is that commodities like oil and their ETFs do not provide a regular dividend distribution. It is very much like gold. So, that’s sometimes, people call oil as the “black gold”. As Mr Warren Buffett once said about buying gold, you are just taking a bet that someone else is willing to buy it from you at a higher price in the future for whatever reasons. By the way, he doesn’t invest in gold as it does not provide productive income to him.

Caveat Emptor

So, let me use this term loosely ” Caveat emptor”, which means “buyer beware, buy at your own risk”.

I guess from high risk high return perspective. Oil fits that perfectly. It can be very rewarding if you got it right. If you get it wrong, be prepared to lose a large portion of your investment.

There are many factors determining the price of oil

Some of more common ones are

  • Demand of Oil (China is a major oil importer)
  • Supply of Oil (does OPEC sounds familiar)
  • Legislated Quality of Oil (affects demand for sweet or sour crude … do people really taste oil?)
  • Renewables (how fast will renewable energy source replace fossil fuels, heard about peak oil theory?)
  • Speculation (many in the markets)
  • Political situations in the oil producing countries
  • War

windenergy

Happy reading and have a great Investment week ahead.

  • Contributed by: Warriortan
  • #warriortan, #investforyourself, #investoil
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