Buying Oil, how best to do it ?

Buying Oil, how best to do it ?

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Discussion

ExPat2B

Original Poster:

2,157 posts

199 months

Friday 22nd January 2016
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My position is that Oil is absurdly low right now, it has been forced down below its real value by geopolitics and everyone involved is hurting and it will have to come back up eventually.

How can I best capitalise on this ?

I want to limit my risk to £10,000. I want to take a long position, happy to wait 12 months.

I usually buy technology stocks, I have not dabbled in commodities before.

I have been playing with Options via a demo trading account, there seems to be many problems taking a long position.

  • Daily charge for the interest as it is essentially a leveraged position
  • Vulnerable to the sudden temporary downwards movements, possibly triggering a Margin call and resulting in liquidation of my account.
  • multiplication of risk.
However I can see how it is a real multiplier of wealth, I have turned my inital 10,000 stake into 350,000 in short order - although I was exposed to so much risk I would had to sell my house and declare myself bankrupt had it all gone wrong.

However I am tempted to simply buy a small position to limit my total overall risk. And as oil is just so low, I think this is doable :

For example Brent Crude is currently at 3114.

If I buy in at £4 per point my total risk is limited to 12,456, and probable total risk ( oil would not hit zero ) would be more like 10,000.

Margin on oil is 1% so I would only need £124 deposited to make the worst case margin requirement.

If Oil were to go back up to 12000 total profit would be 35544. If were to go back up to 10,000 ( the level it has been trading around for 10 years ) it would be 27540. ( of course I would not make this total amount, you would have to minus the interest on the position and the brokerage fees. )

Have I made any errors in my maths ? Do I understand the situation correctly ?

Of course I could instead look to buy 10,000 pounds worth of shares in oil companies that I consider undervalued, but I don't know much about oil companies so would not likely realise the full value.


sideways sid

1,371 posts

214 months

Friday 22nd January 2016
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I think you have answered your own question pretty well.

It sounds like you're using a spreadbetting account, and your maths looks right.

Oil's up >6% now since opening an hour ago, so your position would have increased in value by over £700. Before the cost of the spread of course.

Another alternative is to buy Call Options, which you can also do with some spreadbetting accounts, but you need to do some homework to understand how they work. Buying a spreadbet on the price, as you suggest, is more straightforward.

ExPat2B

Original Poster:

2,157 posts

199 months

Friday 22nd January 2016
quotequote all
sideways sid said:
I think you have answered your own question pretty well.

It sounds like you're using a spreadbetting account, and your maths looks right.

Oil's up >6% now since opening an hour ago, so your position would have increased in value by over £700. Before the cost of the spread of course.

Another alternative is to buy Call Options, which you can also do with some spreadbetting accounts, but you need to do some homework to understand how they work. Buying a spreadbet on the price, as you suggest, is more straightforward.
Yes it is a spread betting account.

Yes it almost painful watching oil rise today, but it looks like there have been lots of "dead cat bounces" on the way down to its current position so I don't actually trust it is a real rally.

I want to do it this way, as you normally don't see a commodity trade at 30% of its potential value. Usually doing it this way would have more risk than reward, but as it is so low the position is reversed....I haven't seen an opportunity quite like this before.

I am open to any method as long as risk can be kept under control. Normally I just buy "straight" stocks and hold them for years so I am a newbie at this game, and it is a very dangerous game for a newbie.



fido

16,752 posts

254 months

Friday 22nd January 2016
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ExPat2B said:
I am open to any method as long as risk can be kept under control.
Good luck with that .. oil is incredibly volatile .. I found limiting the £/point is key to this. Stop losses are useful but will cost you (in more ways than one).

ExPat2B

Original Poster:

2,157 posts

199 months

Friday 22nd January 2016
quotequote all
fido said:
ExPat2B said:
I am open to any method as long as risk can be kept under control.
Good luck with that .. oil is incredibly volatile .. I found limiting the £/point is key to this. Stop losses are useful but will cost you (in more ways than one).
That's why I am asking questions - if I am buying in at £4 a point, are my total losses ( ie, in the event someone invents a magic machine than can pump a billion barrels of oil a day and the price hits zero ) limited to £12456 ?

If the price were to temporarily dip to 10$ which some people are predicting....that would leave me with a £8456 Margin, would be required to deposit £8456 in my trading account plus any interest payments daily on the position until the price recovered ?

Do I understand correctly ?

Pheo

3,324 posts

201 months

Friday 22nd January 2016
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I was wondering if Oil ETFs where a good way of achieving this kind of investment - as with the OP, I'm thinking long term here - I can't see oil prices staying this low forever, even if they don't hit $140 a barrel again!

Any thoughts?

R11ysf

1,931 posts

181 months

Friday 22nd January 2016
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ExPat2B said:
That's why I am asking questions - if I am buying in at £4 a point, are my total losses ( ie, in the event someone invents a magic machine than can pump a billion barrels of oil a day and the price hits zero ) limited to £12456 ?

If the price were to temporarily dip to 10$ which some people are predicting....that would leave me with a £8456 Margin, would be required to deposit £8456 in my trading account plus any interest payments daily on the position until the price recovered ?

Do I understand correctly ?
Yes and no. Your maths is correct but only for front month oil. You will be betting on a delivery contract for oil probably due in either February if it is a serial, or March if quarterly. The price for 1 year out oil is not 3114. I have no idea what it is without checking but it will be much higher.

When oil contracts expire and you roll to the next one you will lose out in the roll spread. You need to look what oil contracts for delivery further out in the future are to actually get the correct exposure you are looking for and as with everything you will pay for future pricing as the other side of your bet will have to hedge it out.

Ozzie Osmond

21,189 posts

245 months

Saturday 23rd January 2016
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ExPat2B said:
I want to limit my risk to £10,000. I want to take a long position, happy to wait 12 months.
Frankly you could just buy a FTSE 100 tracker fund.

But if you want an even more concentrated exposure just buy shares in two or three big oil companies. Amongst other things you'd need to decide whether you think "exploration" or "production" is the better bet.

I have to say 12 months is pretty short-term for stock market investing.

dodgydave

97 posts

182 months

Saturday 23rd January 2016
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Brent prices for future delivery at close on Friday are;
Dec16-37.95 Dec17-42.22 Dec18-45.29 Dec19-47.53.

DonkeyApple

54,923 posts

168 months

Sunday 24th January 2016
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Main thing I would just point out is that your assertion that oil is cheap and below its true value is incorrect.

Fair value is well under $20. There is more than enough sub $20 oil coming out of the ground to meet global demand.

It is important to appreciate that every cent above this fair value is profiteering so the premis of wanting to buy now on the grounds that it is cheap isn't quite correct as oil is still expensive.

What you are trading for on the long side is, in the short term, a short seller's squeeze, in the medium term a change in market sentiment and an increase in forward buying and a new OPEC price floor that will artificially hold the market above fair value and a squeeze on supply because of the recent drop in infrastructure maintenance.

With spread betting you need to keep a very clear eye on both your leverage and your funding costs as most people don't and so they get carried out on volatility spikes and end up paying huge funding costs.

As an equity investor and looking at a time horizon that is probably going to be a few years then you might prefer to find an ETF that is structured around quoted oil and commodity companies.

Edited by DonkeyApple on Sunday 24th January 09:50

Ozzie Osmond

21,189 posts

245 months

Sunday 24th January 2016
quotequote all
DonkeyApple said:
Main thing I would just point out is that your assertion that oil is cheap and below its true value is incorrect.

Fair value is well under $20....every cent above this fair value is profiteering so the premis of wanting to buy now on the grounds that it is cheap isn't quite correct as oil is still expensive.
"How much is the fish?".

https://www.youtube.com/watch?v=Qlb57uzn1zE


DonkeyApple

54,923 posts

168 months

Sunday 24th January 2016
quotequote all
Ozzie Osmond said:
http://youtu.be/TRVaU9X0rOs wink

Retail small cap, oil stock buyers. All very clever and impressive investors but just changing the music reveals the true picture. biggrin

Edited by DonkeyApple on Sunday 24th January 10:55

davepoth

29,395 posts

198 months

Sunday 24th January 2016
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DonkeyApple said:
As an equity investor and looking at a time horizon that is probably going to be a few years then you might prefer to find an ETF that is structured around quoted oil and commodity companies.

Edited by DonkeyApple on Sunday 24th January 09:50
Otherwise known as a FTSE100 tracker, really.

Investing in oil companies rather than oil itself takes a lot of the risk out, and dividends hover around 2% annually regardless of what the capital does. The only trick is spotting the bottom of the market.

DonkeyApple

54,923 posts

168 months

Sunday 24th January 2016
quotequote all
davepoth said:
DonkeyApple said:
As an equity investor and looking at a time horizon that is probably going to be a few years then you might prefer to find an ETF that is structured around quoted oil and commodity companies.

Edited by DonkeyApple on Sunday 24th January 09:50
Otherwise known as a FTSE100 tracker, really.

Investing in oil companies rather than oil itself takes a lot of the risk out, and dividends hover around 2% annually regardless of what the capital does. The only trick is spotting the bottom of the market.
All I'd say is that not all the commodity stocks will be staying in the ftse100. So their price falls have reduced their weighing in the index already and it's not likely to grow to previous levels as some are going to be booted out. And with the other constituents some will net gain from low oil some will lose and others have to hedge it out.

I'd be adding to overall ftse exposure on a long term investment portfolio at the moment but if I want specific additional exposure to the future uplift in oil prices then I'd look for a more specific etf.

DoubleSix

11,691 posts

175 months

Sunday 24th January 2016
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All good advice you're getting here OP.

You do need to watch what kind of ETC you are buying if you intend to hold through rollover months.

I've known people be 'cannibalised' in markets that are in backwardation.

Perhaps DA can elaborate as I'm off out...

Ozzie Osmond

21,189 posts

245 months

Sunday 24th January 2016
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Shell and BP combined still have a market value roughly equal to all of the bottom 30 companies in FTSE 100 added together. I don't think they'll be dropping out of the index any time soon.

DonkeyApple

54,923 posts

168 months

Sunday 24th January 2016
quotequote all
Ozzie Osmond said:
Shell and BP combined still have a market value roughly equal to all of the bottom 30 companies in FTSE 100 added together. I don't think they'll be dropping out of the index any time soon.
But what about the other constituents? The remaining 92% of the value of the index? What's their relationship to oil price? It's this remainin 92% that is important as it's the dominant driver.

Even Shell has a chemicals division which will be benefitting hugely from the fall in its raw material costs. It always used to be (20 years ago) that you'd trade Shell against BP in a falling oil market because they were structurally very different companies.

But this is also just one commodity. We are in the middle of a total revaluation of all commods that began in q3 2012. The combined weighting of commod stocks in the ftse has been falling and will keep falling as the weakest are removed (one impact) and replaced by faster growing stocks from other sectors ( second impact).

Edited by DonkeyApple on Sunday 24th January 11:48

twinturboz

1,278 posts

177 months

Monday 25th January 2016
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DoubleSix said:
All good advice you're getting here OP.

You do need to watch what kind of ETC you are buying if you intend to hold through rollover months.

I've known people be 'cannibalised' in markets that are in backwardation.
Yup most of the etf's are based on front month contracts so probably better suited to short term trading. The only one I can think of that might suit the op is Usl.

It's based on the average of the next 12 months so tries to minimise contango.

bmwmike

6,918 posts

107 months

Monday 25th January 2016
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BP are fairly low at the moment and pay a decent dividend if that helps at all.. bit boring though I guess.

z4RRSchris

11,221 posts

178 months

Monday 25th January 2016
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buy 5 year oil. wait for rebound in 2/3 years time