Sorry for the short hiatus. I went on a vacation where I thought I’d have some time to write. It was one of those vacations that was supposed to be relaxing. Unfortunately, every little thing went wrong and just seemed to cause more stress. Even if I had the time, the hotel’s wifi didn’t reach my room.
I’m chalking the experience up to learning an important travel lesson, but that’s an article for tomorrow.
Today, I want to write about oil. (I write about oil every every couple of years).
When I got back, I decided to check in on my stocks. I noticed that my oil ETF (NYSE: USO) was hitting a new 52-week low of $9.24. I have been buying USO for awhile. In fact, I have dollar cost averaged it down from an initial purchase a little under 20 in December 2014 (if memory serves).
TD Ameritrade now lists my cost-basis (i.e. my break-even price) at $13.82. I need USO to rise 33% just to break-even. That’s bad… very bad.
I made a fundamental mistake of investing. I didn’t know what I didn’t know.
I knew that oil markets trade very differently than stocks. It’s a supply and demand commodity. I had figured that demand for oil would keep rising in the short term. What I didn’t know is that the U.S. was producing so much shale oil that there’s more oil than people need. There almost seems to be no limit to how much supply we can produce. OPEC can’t control prices if the US can supply so much of its own oil.
As I was going through my mail, I found a related article in my inbox: This is How Big Oil Will Die. (It’s a few weeks old now, so it wasn’t a trigger for this collapse.)
The article is a great read. It essentially makes the same case I did last year with my Uber gPod article. Autonomous, on-demand, electric cars are coming and they’ll be so efficient that oil may not power cars as soon as 2025. (I was predicting 2030 in my article.) I took it a step further and suggested that the electric cars would charge from solar panels. While oil will still be necessary for other things, the economics seem to dictate that the demand for oil is going to drop significantly. That’s not going to do my investment in oil any favors.
The only question seems to be when this “oilmageddon” will happen. Of course, those estimates are nearly 10 to 15 years away. Many people consider those estimates extremely aggressive.
I’m considering dollar cost averaging some more at these low $9.20-ish prices. I’m fighting some psychological investing issues:
- They say never fall in love with a stock. Since oil is a commodity, I don’t whether this applies.
- The other thing I’m wondering is “Where else does a value investor put his/her money nowadays?” As I recently wrote, stocks are really expensive now. This is perhaps the only thing that seems “cheap.”
What do you think? Anyone know where oil is going? Let me know in the comments.
Are you aware that USO suffers from price decay, so your performance would be worse than that of oil prices over time.
However, USO suffers from significant time decay, which should not be underestimated. First of all, the price of oil currently has a contango structure, i.e., the spot price is much lower than the price of future months. At the moment, the size of the contango is $0.20 per month or 0.5% per month. The ETF also loses value over time from the resizing of its total position every day in order to track the performance of the spot price of oil.
If you like oil, you may find it interesting to invest in the producers or make a broader energy ETF bet instead.
I didn’t know that at all DGI. I just did a lot of reading and USO seems to be a terrible investment overall.
I’m not a big fan of investing in individual companies because then you run the risk of picking the wrong one. I don’t know if Chevron is operating its business as well as Exxon or vice versa. A broader energy ETF isn’t what I’m really for either as that may mix in natural gas. However, that might be the closest that I come to finding something that does what I want it to do.
For those looking for some good reading on the topic, please see: http://www.mymoneyblog.com/bet-oil-prices-uso-etf.html
“I’m not a big fan of investing in individual companies because then you run the risk of picking the wrong one. ”
If you hold only one company, and your fortunes are dependent on one company I agree this is very risky. However, if you buy something you have not researched thoroughly, this is very risky even if it is an ETF.
If you build a portfolio of many individual companies, this is less risky. Diversification works well. However, making a sector bet is risky too, even with XLE/VDE, since only a few companies account for a disproportionate amount of said indices ( 65% – 70%).
Take care!
DGI
Over the past couple of years, I have read about 50 articles on USO and not once had come across anything about contango or anything about the inner workings of how the future contracts roll and work. I considered that pretty thoroughly researched. I had also tracked the movement on a day to day basis and when oil prices went up, the ETF went up.
The USO is part of the 10% of my stock portfolio that isn’t index funds. I don’t mind being a little risky with it. I was simply hoping to bet on oil prices “purely.” I thinking that XLE/VDE would be a better fit now that I understand that USO isn’t really doing what I thought it was doing.