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I'll Take My Oil Without the Barrel, Please
Jennifer Openshaw
01/31/07 - 01:24 PM EST
Over the long run, what could be more certain than the rising price of oil? Increasing demand, shrinking supply, China, Iran, Russia and OPEC are all familiar stories.
In fact, what would make you feel more secure than having a few thousand barrels of your own in a private backyard reserve? No more shortages, no more price spikes. Wouldn't that be nice? And for some extra cash, you could sell a barrel or two when things get bad again.
But how practical is that? You can keep gold in a vault or wear it around your neck. But what about oil? Fill your swimming pool? Build a tank? A rail siding with a tank car or two next to your driveway?
You can invest in oil, but it's hard to get a pure play. Most oil investments involve buying an oil business, such as an oil or oil-service company, or a financial derivative, such as a futures contract. But you want to keep it simple. You want to buy oil.
And you want to do it now, because it's down sharply from last year's highs. Admittedly those highs may reflect emotion and overdone commodity speculation, but today's prices seem just as emotionally low, presenting a one-time opportunity. If you agree, what better way is there to hedge your investments against geopolitical uncertainty and inflation than buying oil?
Click here for the video version of this story from Jennifer Openshaw.
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Fair -- Oil stocks: Buying stocks in oil, oil-service or oil-refining companies is the conventional approach, but your oil price bet is only indirect. You're really betting on the quality of the company -- its management, market position, asset and reserve quality, geopolitical risk exposure and regulatory compliance. It's easy, and you might get a nice dividend while you wait, but you're taking on a whole set of additional factors and risks.
Fair -- Oil stock funds: Stock mutual funds and ETFs that specialize in oil and oil-service indices are less risky than buying individual stocks, but they are another step removed from a pure play, and you may pay 50 to 150 basis points or more (0.50% to 1.50%) in management fees.
Good -- Oil futures: Oil futures tempted a lot of individual investors -- and institutional ones too -- as prices ran up last summer. But you have to know what you're doing. Sure, you can control a lot for a little. In this case you can own 1,000 barrels, or $52,000 worth of crude, with a $4,000 down payment (the rest is margin). But you must be right, and you must be right by a particular date, or you lose it all. I don't know about you, but it's hard for me to tell when oil will rise; I just know that it will.
- Better -- Oil-linked ETFs: Two new oil trusts, the U.S. Oil Fund(USO Quote) and the iPath Goldman Sachs Crude Oil Tracking Index ETN(OIL Quote) invest in oil futures and futures options, but they "roll" the contracts so that your bet isn't tied to any particular time period. Your investment is closely, but not exactly, tied to the price of oil. Futures prices will vary by market conditions, including volatility and other supply/demand considerations. And these investments throw off no cash return while costing 65 to 75 basis points (0.65%-0.75%) in management fees.
Best -- Claymore MacroShares: Fund manager Claymore Securities took a clever approach to buying oil without buying oil. It simply set up two baskets of Treasury securities. Two funds, the Claymore MacroShares Oil Up Tradeable Shares (UCR Quote) and the Claymore Macroshares Oil Down Tradeable Shares(DCR Quote) trade side by side each day.
If the price of oil rises, securities are transferred from the Down fund to the Up fund, adjusting the net asset values according to the oil price change. If the price runs to $120 a barrel, the Down fund is depleted, and the funds are terminated and paid out. Meanwhile, the Treasury securities pay a return, which is applied to the rather hefty 1.6% management fee, with the balance paid to you.