Noticias de la Cámara
Oil on an old-time high | Hugo Investing
11/04/2022
Petrol prices are through the roof!
Wherever you go lately, there is talk about the high petrol prices and how this is directly impacting people’s wallets. I was asked again today by a fellow investor ‘’How can I anticipate this movement?’’
In this column, I will briefly present three possibilities of how you, as an investor, can respond to the rising oil price. I will start with the more complicated option and conclude with the easier one.
Number 1. The other day we had a gentleman in the office who said: “I would like to buy a couple of barrels of oil”. Unfortunately, it is still not possible to reserve a few barrels of oil somewhere in a harbour or a refinery! Most trading in oil takes place on the markets through futures contracts. The most popular ones are Brent Crude and Light Sweet Crude Oil. But beware! Before you are tempted to quickly take a position in a futures contract, it is important that you realize that these contracts have several characteristics that can influence your degree of success while trading. First, there is the contract size; if you buy one future contract on Brent Crude or Light Sweet Crude you will have ‘’1000 barrels’’ of oil in your possession.
Secondly, you must consider the fact that a future contract has an end date. Future contracts expire 1 month prior to expiration. For example, the future of the month of May already expires in April. With the expiration date, it is important that you realize that the future price of a barrel of oil could be higher or lower than the current price. This can cause your position to suddenly become loss-making because your position must be shifted to a later expiry date. When the future price is higher than the current spot price, we speak of Contango, and when the price is lower, of Backwardation.
A 2nd possibility to respond to a rising oil price is by buying oil-related companies. As the product these companies sell, oil, becomes more expensive, this generally has a favourable effect on the price of these companies. Below you can see a graph of the price development of the companies Exxon, Repsol, Shell, and Chevron.
You can see that these companies and Brent Crude Oil and Light Sweet Crude Oil all show a rising pattern (picture below). The advantage of buying shares is that you will also receive a dividend of about 3-4% per year.
Number 3. Finally, you can also opt for a simpler solution by buying an Exchange-Traded Fund (ETF). An ETF is a basket of shares that follow a certain index. The largest and best-known ETF is the U.S.O., short for United States Oil Fund, which aims to track the price of Light Sweet Crude Oil as closely as possible. As a counterpart to this ETF, you can opt for the BRNT or also the WisdomTree Brent Crude Oil ETF, which is designed to follow the Bloomberg Brent Crude Subindex. However, with these two ETFs, you should bear in mind that you are investing in futures, so you may have to deal with the Contango and Backwardation as explained earlier.
If you prefer to invest in companies that operate in the oil sector, you can always opt for an ETF in oil and gas companies. If you are looking for European equities, you can choose the Lyxor STOXX Europe 600 Oil & ICBE ETF, for example. If you prefer to invest in US oil and gas companies, you can opt for the iShares Oil & Gas Exploration & Production UCITS ETF. As you can see, investing in oil is not as simple as you might initially expect. Whether you choose a future, an individual share, or an ETF, be alert that you do your homework well, so you know exactly what your potential risks are.
Academy for Investors
Our goal at the Academy for Investors is to guide private investors to become better investors. After years of working with private investors, we realized that just a great platform and in-depth tools are not enough for people to become better investors. Based on our real-life experience, we developed online courses to help private investors achieve their goals. The courses are online, fully interactive and videobased. Start today at http://academy-for-investors.com/ Contact us At Academy for Investors, we are always ready to answer your questions, regarding the courses, subjects, or other remarks or questions. You can mail us at support@academy-for-investors.com or call +34 952 924 011. Finally, we also have an office where you are always welcome with or without an appointment.
