Grandich's Blog

This perma-bear has decided to jump back into oil. The risk-reward has moved back to the reward side. Back a year or so ago, I stated that “Peak Oil” was real but its impact won’t be truly felt until the next economic cycle. While that cycle appears a long way off given all the problems worldwide, the price of oil in my eyes has come down far enough to begin accumulation of oil-related investments. It’s critical to realize we can go down before up so unless you’re extremely aggressive and a true speculator (we all are until we’re losing money), the best route may be to stagnate your purchases over a certain period of time or price levels. I think one should at least place one-third to one-half of their capital allocated to this sector right now. I don’t think anyone should use more than 5%-15% of their total investment capital into this sector (depending on many factors including your total wealth, age, risk tolerance and how much you would want to kill me if I end up wrong).

 
There’s an old song entitled, “What a Difference a Day Makes.” Just six months or so ago, oil was nearly $150 a barrel and the so-called experts said $200 was only a question of “when”. Now we hear calls for $25 or even lower. Have the fundamentals changed that much from just this past summer? For the short to intermediate term, yes. The tremendous economic contraction worldwide and especially in the U.S. (25% of the world’s daily oil consumption is in the U.S.) has and will continue to pressure oil prices. But make no mistake about it; the world will eventually recover to the point where Peak Oil does indeed become a living and lasting reality.

So, how should one play this? There’s no single answer, as many individual factors that each reader has will make “one size fits all” impossible. Only you know your circumstances. However, I can point to some ways I personally like and you can decide if their suitable for you.

Ideas:

• I’m still quite leery of equities in general but having direct exposure to the oil price itself is warranted. For me, I like DXO-NYSE for leverage. For unleveraged OIL-NYSE.
• For the many Canadian readers who wish to purchase Canadian ETFs, HOU-TSX offers double leverage to the crude price.
• As noted, I’m refraining from pulling the level on oil-related equities but if you so desire, look at IYE-NYSE and XLE-NYSE. For Canadian investors, look at HEU-TSX.

Worthy Read on Peak Oil

Breaking below a multi-year low is not usually a good time to buy anything, but I appear to have ants in my pants for oil. I haven’t heard one bullish comment on oil in weeks (just like I didn’t hear one bearish one near the top). Again, I must emphasize that in all likelihood this is not the bottom. We could go several dollars lower. But, if we do and you allocate as suggested, I think 1 to 3 years from now we should be looking at profits. Because I’m still very bearish on equities in general and the belief oil can still go lower, I’m going to refrain from oil-related equities at this time.