oil price.

[Cobra Joe]

Originally Posted by Annixter

Private citizens pretty much cannot buy actual stock in crude oil. The best one can do is trade in oil futures, but you'll need to hold a minimum of $10,000 liquidity in your account to do that with most brokers and be prepared to break even or get wiped out should oil continue to stay low or go lower. The fear there is that as soon as global oil demand rises again, Russia and the Saudis will reinstate their price war to secure contracts and corner the market. This would keep oil prices low if not lower.

The second best thing one can do is a ton of research on companies' financial health and take a substantial risk buying stock in smaller oil exploration and mining companies whose stock has tanked and hope the companies survive long enough for their stocks to rise.

Neither of these two options will allow you to own actual stock in oil. You'll either own stock in speculating what oil will be worth in the future, or you will own stock in exploration/mining companies.

Investing in big oil corporations is a nonstarter since they aren't hurting much at the moment. For instance, Chevron was at about $90/share two weeks ago prior to oil diving below $0. Their stock decreased to $82/share the day oil crashed, and as of closing Friday, stock was back to about $88/share. Same pattern goes for Exxon, Philips 66, and the other major US corporations. There's no profit to be made there due to the oil crash.

As for oil ETFs, they are a ponzi scheme during volatility since they don't hold stock in actual crude oil but instead track futures indexes that are months behind what is currently happening. Those ETFs work pretty well when oil is stable, but when it's volatile they are junk since it takes months for their true value to show in the market. People buying ETFs now thinking they're going to cut a fat hog in four months will be shocked in four months when those ETFs finally catch up to the April crash and the ETF stock is worthless while oil prices might be much higher at the same time.

Trading in actual crude oil is a game only billionaires, millionaires, and corporations who have the capital and ability to store physical oil can play. The rest of us get to dream about how cool it would be to buy thousands of dollars of oil at $0.01/barrel, store it somewhere, sit on it for a couple years, and sell it at $60/barrel. In reality, the best we can do is buy a few 55 gallon drums of gas for $65/each, put them in our residential garage/shop for later use, and hope they don't blow up our house and cars or that the neighbor doesn't call the cops. We then wait until the price of refined oil decreases, buy out all our local parts stores of our preferred viscosity, and have enough oil for three lifetimes of oil changes. In either case, we'll be those weirdos standing outside a gas station in four years trying to sell quarts of oil and gallons of rotten gas at a discount out of the back of a 1949 F1 panel truck.

Well said

[Annixter]

Originally Posted by Tinker

Like anything, you speculate futures. It's a gamble. You can invest as an individual in commodities. . . . Oil is a safe investment.

Again, 99% of us cannot invest in the actual commodity of oil as an individual or even as a group of people, and there is no practical way to invest in the oil industry at this very moment. If I as an individual could invest in actual oil as it trades in real time, I would have bought $10,000 worth of crude barrels at $0.01 two weeks ago. I would have sold today at $11/barrel and would be $11 million rich. Instead, I'm drinking a beer chatting on the Barn worrying about whether I'll have a business in four months. Crude oil is not like gold where you go buy an ounce worth of coins, put them in the safe, and sit on them.

Now, why is there no practical way for most people to capitalize on oil's low prices at this very moment?
1) ETFs are junk because they are invested in futures from months ago when oil was $30/barrel. No wise person would invest in a stock that tracks oil contracts promising to sell oil on May 15th for $30/barrel when oil is currently trading at $11/barrel. He'd lose all his investment on May 15th.

2) Futures are one of the most risky ways to invest. Only the bravest or most careless will venture into that territory right now with the worldwide recession digging in its claws and with oil demand unlikely to rise greatly in the near future.

3) Big oil companies' stock did not follow crude oil's crash. If one were to invest in oil companies today, he will likely be very disappointed in three months when quarterly earnings come in extremely low and the stock tanks due to the lack of sales right now.

4) As with futures contracts, investing in small oil exploration and mining companies right now is extremely risky. The very company one invests in has a great chance of declaring bankruptcy in the next year should the global recession continue or worsen, which the vast majority of analysts expect whether we like it or not.

As for oil being a safe investment, I beg to differ. It's one of the most volatile investments that depends on some wildly unpredictable variables such as global politics, war, gasoline/diesel demand, manufacturing demand, country oil production manipulation, country agreements, whether working from home becomes a popular, permanent option in companies, etc. Oil went from $20 to $-38 in one day and was back to $14 a week later. That's not safe; that's wild. You won't see financial advisers telling their clients five years away from retirement to "invest in oil, it's a safe investment."

Oil is a great investment to help diversify one's portfolio by adding risk, not safety, but not right now. Many analysts suggest investors wait until oil stabilizes at around $30/barrel and sits there for 6 - 12 months. At that point, it's as safe as investors are going to get to invest in oil ETFs. Once oil hits $50/barrel and sits there for 6 - 12 months allowing the ETFs indexes to catch up and stabilize, it's time to sell. The issue is that as of right now it might take years before we see stable oil prices at $30, so it's the waiting game before even being able to invest let alone turn a profit.

[tomcarman]

For us little fish in pond what does ETF mean? Never studied econoics.

[V8COOPMAN]

Originally Posted by tomcarman

For us little fish in pond what does ETF mean? Never studied econoics.

They're "Exchange Traded Funds". DD

[Annixter]

Originally Posted by tomcarman

For us little fish in pond what does ETF mean? Never studied econoics.

Originally Posted by V8COOPMAN

They're "Exchange Traded Funds". DD

As V8Coopman said. Essentially, and this is very boiled down, ETFs function like mutual funds but trade like stocks.

Scenario Example:
You want to purchase stock in ten companies but only have $100 to invest. You have a couple common options:
Option 1) Buy shares in each different company.

• This can be an issue because most stocks don't sell partial shares; you must buy a full share. Your $100 will run out before you can buy shares in all ten companies. If you want to buy into heavy hitting companies like Tesla at $700/share, you can't even touch it with your $100 investment.
• Also, you might not have the time or confidence to manage 10 different stocks.

Option 2) Put your $100 into a mutual fund that holds stock in the ten companies you want. A mutual fund is like a group of people pooling their money, giving the sum to one person as a manager, and that person goes and buys shares in the ten companies. This way, you can own partial shares of a stock. Example: if PPG costs $100/share and 25% of the mutual fund's portfolio is invested in PPG, your $100 investment in the mutual fund means you own $25 in PPG. You wouldn't be able to buy just 1/4 of a share on your own, but you can in a mutual fund.

• Here's the issue with mutual funds. They are very slow to trade by nature since they are complex and managed by another company versus you. If you yourself own 1 share of PPG that you bought at $100 and the stock jumps up to $150 in a matter of minutes, you can immediately sell your share in real time to make your $50 profit. With mutual funds, if you watch the mutual fund price go from $100/share up to $150, the best you can do is put a sell order in and wait. That order will likely be filled hours later. Maybe the stock has fallen back to $100 by that time. You wont' know until the next day since most mutual fund orders don't update until the following day. Essentially, mutual funds are great for long-term investments, but they aren't great for immediate trading--certainly not for volatile investments like oil.

Back to ETFs. An ETF functions like a mutual fund in that you pool your money with other people to buy shares in multiple companies or futures contracts, but the ETF trades like a stock. If you buy one share of an ETF at $100/share, watch that stock's value rise to $150 in a couple hours, you can immediately sell that share. ETFs are cool in this way. Before the crash, I had stock in a lumber and a mining ETF that each owned shares of about 80 companies. Owning individual stock in 160 companies is way too much for me to keep track of since I have a job and trade in the morning and on my lunch break, so I let the ETF manager manage things for me.

The issue with crude oil ETFs is that they do not invest in physical barrels of oil. They invest in what are called "futures contracts." Essentially, when you invest in an oil ETF, you are investing in a bunch of contracts signed months ago that are now, basically, worthless. You might as well burn your money--or send it to me.

[Darrell S]

Sponsored Links (Register now to hide all advertisements)

Annixter, thanks for the understandable explanations for a novice like me.

[Tinker]

Thanks Annixter. How ever we got to this, it is great information you added.

[tomcarman]

Annixter. I'd like to thank you for explaining in laymans terms how this works. Despite yearly meetings with 401K advisors none have ever offered up a detailed explanation of how this complex gambling game works. Perhaps because knowledge is power? So a simple question. I invest $100 in a mutual fund, price goes up to $150. 401K Mutual Fund manager sells for me at a $50 profit (assuming no drop in price between sell order and actual sale). 401K guy gets a cut for managing. I profit the remainder. Am I taxed on the profit and if so how much? What is the typical cut a 401K manager gets and how much tax? Out of that $50 profit how much ends up in my Ford account?

[Tinker]

Most funds just charge a yearly management fee. 100$ or less. Having an advisor that you trust is worth it. Yes you have to claim dividend profit if traded, the forms will come in the mail. loss is another thing. Pay to play. Only way you get hit hard is by pulling it out too early, tax wise.