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2010 EDITION
Much has changed; good investing has not
The Neatest Little Guide to Stock Market Investing, 2010 Edition
It's hard to miss the long-term supply and demand pressures that will push oil prices higher. Almost every investor is aware that oil supply is getting harder to find, while oil demand from growing economies is rising. Furthermore, underinvestment in oil industry infrastructure leaves open the door for an energy shock if a global economic recovery sends demand through the roof and the oil industry has trouble delivering.
Some say that long-term dynamic is what's driven the price of oil up this spring. Benchmark crude closed yesterday at $68.81, it's highest settle since early November. Others doubt that, however, and say that the recent spike has more to do with the declining value of the U.S. dollar than with the economics of oil. Barrels are priced in dollars, so as the value of dollars fall, the price per barrel will rise.
The purpose of this article is not to explore what's driving oil prices now, but rather to look at what type of oil investment is best for the eventual rise in prices for any reason. Is it best to buy an investment that tracks the price of oil, a broader energy sector tracking vehicle, the stocks of large oil companies, or the stocks of oil service companies?
To get an idea, let's compare how representatives from each of those categories fared from July 1, 2008 to February 1, 2009 as oil declined precipitously, then how those same investments fared from February 1 to yesterday's close.
From 7/1/08 to 2/1/09, here's how oil price tracking vehicles performed:
-90.9% PowerShares Oil 2x (DXO) -65.7% PowerShares DB Oil (DBO) -75.4% United States Oil Fund (USO) -77.9% iPath S&P GSCI Crude Oil ETN (OIL) -56.0% ProShares Oil 2x (UCO) [from Nov.]
From 7/1/08 to 2/1/09, here's how various energy-sector tracking vehicles performed:
-56.6% iShares Dow Jones U.S. Oil & Gas (IEO) -49.7% Vanguard Energy ETF (VDE) -47.9% Energy Select Sector SPDR (XLE) -82.1% iShares S&P Global Energy (IXC) -78.1% ProShares Dow Jones U.S. Oil & Gas 2x (DIG) -31.0% Direxion Russell 1000 Energy 3x (ERX) [from Nov.]
From 7/1/08 to 2/1/09, here's how various oil company stocks performed:
-63.7% PetroBras (PBR) -40.3% BP (BP) -41.2% Royal Dutch Shell (RDS-B) -13.4% Exxon Mobil (XOM) -50.5% ConocoPhillips (COP)
From 7/1/08 to 2/1/09, here's how various oil service company stocks performed:
-66.2% Pride International (PDE) -65.1% Transocean (RIG) -24.6% TEPPCO (TPP) -55.9% Diamond Offshore (DO) -59.1% Noble (NE) -71.0% National Oilwell Varco (NOV) -66.9% Ensco International (ESV)
Now, for the rally from February's lows.
From 2/1/09 to yesterday, here's how those same oil price tracking vehicles performed:
+79.5% PowerShares Oil 2x (DXO) +37.3% PowerShares DB Oil (DBO) +32.5% United States Oil Fund (USO) +31.5% iPath S&P GSCI Crude Oil ETN (OIL) +33.1% ProShares Oil 2x (UCO) [from Nov.]
From 2/1/09 to yesterday, here's how those same energy-sector tracking vehicles performed:
+22.7% iShares Dow Jones U.S. Oil & Gas (IEO) +16.8% Vanguard Energy ETF (VDE) +14.4% Energy Select Sector SPDR (XLE) +22.2% iShares S&P Global Energy (IXC) +17.8% ProShares Dow Jones U.S. Oil & Gas 2x (DIG) +13.7% Direxion Russell 1000 Energy 3x (ERX) [from Nov.]
From 2/1/09 to yesterday, here's how those same oil company stocks performed:
+72.8% PetroBras (PBR) +23.7% BP (BP) +18.6% Royal Dutch Shell (RDS-B) -4.1% Exxon Mobil (XOM) -1.7% ConocoPhillips (COP)
From 2/1/09 to yesterday, here's how those same oil service company stocks performed:
+60.7% Pride International (PDE) +54.3% Transocean (RIG) +20.7% TEPPCO (TPP) +40.5% Diamond Offshore (DO) +36.5% Noble (NE) +52.4% National Oilwell Varco (NOV) +49.2% Ensco International (ESV)
Remember all that talk about contango back in February, and the astute onlookers who said anybody dabbling in the leveraged long funds would be screwed to hang on? Nice tip that proved to be. DXO is up almost 80% since then.
Moreover, the oil price tracking vehicles that so many scoff at for failing to track precisely have been just as good as the major stocks involved. Compare the losses and rebounds of the price tracking vehicles with the oil service company stocks. They went way down and then came way back. For all the talk of contango and slippage and the uselessness of daily tracking vehicles, none of it prevented the ETFs and ETNs from doing what they were supposed to do over the medium terms involved. Remember that the next time some part-timer tries to sound wise by pointing out that the leveraged ETFs are calculated on a daily basis -- as if you didn't know that by now, and as if it means they can't work for periods beyond a single day.
For longer periods, though, against the backdrop of rising oil as demand outstrips supply, oil service company stocks look to be the place to be.
