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Newbie question: How to take advantage of low oil price?

Discussion in 'Commodities' started by goldenfuture, Jan 18, 2015.

  1. goldenfuture

    goldenfuture

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    Dear all,

    I am a newbie to shares and commodities investing, and would like to ask how to take advantage of the currently very low oil prices?

    Any advice would be greatly appreciated ... thanks in advance!
     
  2. minwa

    minwa

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    Don't fight the downtrend - my view.

    But if you must try pick the bottom - easiest but worst way is CFDs. Better way is oil futures or ETFs. Not sure if they're available on ASX.
     
  3. pixel

    pixel DIY Trader

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    Try and Google "trading falling knife"
    You can start with Investopedia http://www.investopedia.com/terms/f/fallingknife.asp

    In the end you'll know why it's never a good idea to "expect" a reversal based on the fact that something has been sold down sharply. Nothing has fallen so low that there isn't a chance of it falling even lower.
     
  4. burglar

    burglar

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    Fill your tank!
     
  5. hhse

    hhse

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    Sell a put option on oil ETF. Lowers your cost basis, and is a bullish play short-med term.
     
  6. Smurf1976

    Smurf1976

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    It depends on what you're expecting to happen next.

    If oil goes back up then holding an oil ETF, or the shares of an oil producing company, is one way to profit.

    If oil falls further or remains at current prices for an extended period then that's good for the profits of those who have oil as a major business cost. Airlines are the obvious example there.

    Either way there's an element of risk. Oil is subject to the normal supply and demand forces that affect any commodity but is also subject to political actions. For example, the USA holds a fairly large stockpile (the Strategic Petroleum Reserve) of oil and could flood the market in the short term, thus crashing the price, if they wanted to. On the other hand, that reserve isn't full so they could buy more and so could other countries thus adding "artificial" demand and pushing the price up.

    Then there's the major producers who could, either for self interest (higher prices) or political reasons choose to slash production and create a shortage. That has certainly been done before, most spectacularly in the 1970's. Also worth noting that a lot of oil comes from countries not overly keen on the West such that a decision to withhold production may be motivated by factors other than pure economics.

    And finally, a longer term complicating factor is that nobody really knows for sure how much oil can be produced and at what price. Eg at $50 per barrel, what level of ongoing exploration, drilling and production is actually profitable? It would be a smaller amount at $50 than at $100 certainly, but whether or not it's profitable to produce at a rate which meets demand at $50 is a big unknown. Many will argue that the current price is unsustainably low, others disagree.

    Personally, I don't see the price remaining at present levels unless the global economy falls in a heap and consumption falls or at least stabilises. But even if I'm right, markets can move in the opposite direction to fundamentals for quite some time (potentially years) before the inevitable happens.

    I'm not saying don't do it, just be aware that there is no certainty about the future. The only thing that is certain is that oil right now is cheaper than it was in the recent past. But that doesn't mean it will fall further or that it will double in price, the future is inherently uncertain especially where a highly political and relatively hard to store (since it's a liquid versus say, coal, which can easily be just piled up on the ground in the open if someone wants to store lots of it) commodity such as oil is concerned.

    But if you were planning to buy a motor home and drive right around Australia, well it's a certainty that fuel costs less now than it has for the past few years.
     
    tonyparis likes this.
  7. needsajet

    needsajet

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    An option is to buy shares of companies that benefit from the low price of oil (provided they also fit your investment plan and look reasonably priced). Transport and plastics are examples.
     
  8. boliu

    boliu colourbank

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    No Advantage at all, doesn't matter low or high oil price, it is same for everyone.
     
  9. StockTrader010

    StockTrader010

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    Low prices are mainly driven by oversupply, and not so much lower demand. And since most oil-producing countries are currently exporting their oil below production cost, I don't see why current low prices would persist.

    Of course, I wouldn't buy oil futures. I think Oil & Gas producers are a safer bet.

    http://www.ishares.com/us/products/239517/ishares-us-oil-gas-exploration-production-etf

    If you have a sufficiently large investment horizon (> 5 years), why not consider a contrarian position. Unless you think oil prices will remain depressed.
     
  10. goldenfuture

    goldenfuture

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    Re: Oil price discussion and analysis

    Hello all,

    This is a question from a complete beginner. How does one take advantage of the current (very) low oil price? I have never invested in shares or commodities before (apart from in superannuation), so please excuse my ignorance.
    Is it advisable to invest in oil at the present time, and if so, how would I go about it?

    Thank you all,
    RH
     
  11. rimtas

    rimtas

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    Re: Oil price discussion and analysis

    This is a typical thinking for beginer.
    Because you are the beginer, you do not know that oil is still very, very expensive. High price in recent years created incentives that resulted in oversupply. And this will go on for as long as it takes to shake out everyone who was greedy by looking at the $100+ price and developing massive projects hoping that markets already reached a golden plateau and price dynamics is in the past.

    The only way to benefit from the lower( and more lower to come) price is to fill in more petrol and buy cheaper stuff(they will get cheaper ultimately). All other ways involves putting your money at risk, and most of the time you will lose your money no matter where oil would go, because the purpose of markets is to inflict maximum pain on people most of the time.

    So in conclusion-as a beginner, forget the price of oil in the markets and do not try to benefit from its movements.
    The best way for a beginner to start is to buy blue chip stocks. Beginners usually have a very high tolerance for risk and they can hold red positions for years, finally just forgetting about them. But in this case you get dividends, which can not be said by holding oil futures or etfs...

    You need to go with a trend, and oil is in a bear market cycle that will last 30 years. And Stocks are in bull market.
     
    tonyparis likes this.
  12. StockTrader010

    StockTrader010

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    Re: Oil price discussion and analysis

    I doubt oil prices will remain depressed for 30 years. It went from $160 to $25 during 2008-2009. I don't see why a pickup in global growth would not lead to an increase in oil prices (from $45) going forward.
     
  13. burglar

    burglar

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    Filled up just after some petrol stations went up to $1.195.

    Managed $0.995.

    Happy! :)
     
  14. rimtas

    rimtas

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    Re: Oil price discussion and analysis

    I just couldn't resist to make a comment...

    Yes, at the begining there is always a doubt, because there is no any facts. After years of stair-step decline, doubts will finaly disapear.

    Past movement is not an indication of future performance. In fact, market tends to alternate-fast movements are folowed by slow ones, and vice versa.

    Yes, that's obvious, right? So let's make few millions from that:D
     
  15. StockTrader010

    StockTrader010

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    Re: Oil price discussion and analysis

    Haha! True that. Fortunately I put my money where my mouth is (+17,5% on oil ETF).

    But that's just short-term noise/volatility so I don't assign much weight to that. Let's reconsider in 1/3/5 years :D.
     
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