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Time to Start Buying Oil?

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I hope your holiday season is going well. If it's anything like mine, it is busy, busy, busy. That's why you've seen fewer articles than usual here.

I'm also trying to take advantage of the low expectations of the holiday season to reflect on the things that are really important. In November, the family slipped away to Aruba for two weeks. I've written about our timeshare and how to wave money in Aruba not just that once, but twice. I'm still not sure if Marriott Vacation Club is a scam, ripoff, or neither. We recharged just in time to head into the busy Thanksgiving weekend.

I've seen December slip away in catching up with all that while I close on the loan for our solar panels. We also have a change of tenants at a rental property and that has lead us to do a little much needed remodeling. Throw in a wife's birthday, a baby shower near Philadelphia, and holiday shopping and the operative word around here is busy.

It's a good kind of busy though. It's the kind of busy where I can pass on valuable information such as Pats Cheesesteaks is way better than Geno's. I appreciate Geno's love the police and military, but the bread was just too chewy. Also, they need to find a better parking system near the Rocky steps. I'm not going to pay $12-15 (or whatever it was) for all-day parking, when I just want to take 10 minutes to run up the steps and jump around with my arms in the air.

You didn't read this article to hear about my trip to Aruba or Philadelphia though. As Kevin O'Leary of Shark Tank fame might say, "You are here to make money... I'm here to make money... so let's make some money!"

If you own a car, you have probably noticed the quickly gas prices over the last month. Hell, I have friends who don't own cars, who have been active on Twitter mentioning it. Remember when everyone seemed to think that gas was going to $5 in 2012? Yeah, me neither.

I'm not going to bore you with a bunch of macroeconomic stuff like what's going with OPEC and oil speculation from traders. And that's not just because I don't understand it all, but also because I'm too busy to really take the time to explore all the nuances. What I do know is that the United States Oil Fund LP (Ticker:USO) is down 25% in one month, 37.5% in 3 months, and 45% in 6 months.

You have the opportunity to buy a stock for $21 that was $39 back in June. And as much as I love solar, I don't think oil is going away any time soon. If you look at a chart for the entire history of the ETF, it has never been this cheap. In the crash of 2009, it got to $24 for a very brief time, but it has mostly been in $35-40 range for 5 years. During a bubble in 2008 before the crash it got well over $110 for a brief stretch.

Almost anyway you slice it, oil appears to be, historically, very cheap. Here's another chart of oil prices (rather than that ETF) which goes back almost 50 years. It seems to have dipped this low when compared to the CPI only a few times.

I'm always looking for equities to buy on the cheap... especially equities that I am comfortable buying and holding for a long, long time. I feel this is very different than buying shares of Groupon, which may not be around in 5 or 10 years. The biggest risk I can see with this is that oil production stays high, making it cheap until solar takes over. I don't see that as a huge risk, and even then I don't think I'd lose much money buying at these prices. On the other hand, there's a lot of upside if oil returns to its 5-year averages. That would be nearly doubling your money. If that happens in the next 5 years that's a almost 14% return on your investment. (Thanks Rule of 70!) My guess? You'll see it happen faster.

For the most part my holdings have been going up and up this year and I've had trouble finding the bargains in equities that I look for. It looks like the Dow is 9% for the year and I remember the S&P 500 making new records for many days in a row over the summer. I actually held onto cash, because I thought the market would go lower with expected interest rate hikes in the next year.

Well, this is exactly why I keep some cash around. Though even if I didn't have cash, I'd probably sell some of my Vanguard Total Market Index (VTI) and buy into oil. Today I took the plunge and bought some shares of USO at around $21.50. I'm not worried about buying at the absolute low. That's nearly an impossibility. If it continues to lose 2% a day as it has over the last month, I'll look to dollar cost average and buy even more at the new low prices.

Buy low and sell high, right? Well this to me looks like a very rare opportunity to buy very low.

Posted on December 15, 2014.

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8 Responses to “Time to Start Buying Oil?”

  1. Kathy says:

    As a matter of fact, we purchased some Exxon and some Conoco yesterday. At the depressed prices, Exxon is yielding over 3% dividend and Conoco is over 4%. You know they will go back up in value sometime. Win-win in my opinion.

  2. Matt says:

    Great advice! I have had a gut feeling not to just invest and hold right this moment. I got out of some mutuals about 3 or 4 weeks ago that I had held onto the last 4 years or so.

    You just get the feeling of volatility. This is just great advice. Thanks for the reminder!

  3. When it comes to stocks, carnage = opportunity. We’ve decided to buy some Chevron and a couple other non-energy high dividend payers that have been dragged down in this falling market. I’ll likely start dollar cost averaging into these stocks between now and the end of tax loss selling season on Dec 31.

  4. I do love a good financial disaster, and the oil sector seems to be there now.

    Personally, I might shy away from buying a broad index of oil companies only because I think there are going to be lots of little guys going bankrupt under their debt load in the coming months.

    I think the probable value will be the larger companies that will do just fine in the long run.

    But check debt load and repayment schedule carefully. Lots of the drillers and servicers were leveraged to the hilt and are going to have a real tough time in the coming months.

  5. Lazy Man says:

    The ETF that I bought into (Ticker:USO) tracks the price of oil, not a broad index of oil companies. I’m not saying that a broad index is bad and the two are likely to be highly correlated, but I want to avoid the situations you mention, little guys going bankrupt under debt. If that happens, production of oil will likely slow and the price of oil (and my ETF) will go up.

    Obviously, I’m rooting for people to have jobs and small companies to succeed. But if the scenario you proposed happened, it could be a more profitable investment rather than a dangerous one.

  6. Jeff says:

    This is a good call. I remember pumping gas into my Escort when I was in High School. It was $.85 then. I do not remember gas being that low since then.


  7. […] I was reading this month's (well May 2015, because magazines live in the future) Kiplinger's and came across this James Glassman article about investing in cheaper oil. This immediately caught my attention, because I've been investing in oil for months now. […]

  8. […] in December I asked , "Time to Start Buying Oil?" I followed that up by investing in oil, specifically this oil ETF: USO at around $19. I proceed to […]

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