Updated May 20, 2020
With the price of oil skyrocketing (the price recently increased by 14% in a single week), you may be wondering if now is the right time to invest in this commodity.
There are plenty of ways to get in on the oil industry. For example, you can buy stocks of oil and drilling companies. But one of the most profitable – and riskiest – investments you can make is in oil futures.
The energy sector has been a disaster zone this year, as the coronavirus pandemic has decimated global oil demand. West Texas Intermediate, the benchmark U.S. crude, has plummeted nearly 70% to a recent $19.21 a barrel, while Brent, the most popular international benchmark, is down 60%, to $26.34. Most oil and gas producers, including the majors, will lose money in 2020 or barely eke out a profit, and most of those still paying dividends will have to borrow to cover the cost. As for energy stocks, they have made fools of their fans for nearly a decade and now account for a measly 3% of the S&P 500 index.
Yet, the members of Barron’s 2020 Energy Roundtable see glimmers of hope for this beleaguered sector—and long-suffering investors—even though things could get worse before they get better. The painful steps that energy companies are taking to reduce supply and conserve cash are likely to pay off in higher oil and gas prices over the next two years—and stronger operations and balance sheets for the industry’s survivors. Emblematic of recent moves, Royal Dutch Shell (ticker: RDS.B) slashed its quarterly dividend on Thursday by 66%, to 16 cents a share from 47 cents, its first cut since World War II. And on Friday, Exxon Mobil (XOM) reported its first quarterly loss in decades.
Our 2020 Roundtable panelists include Phil Gresh, an energy analyst at J.P. Morgan; Bernadette Johnson, vice president of strategic analytics at Enverus, a data and analytics provider to the energy industry; Patrick Kaser, a portfolio manager specializing in large-cap value stocks at Brandywine Global; and Robert Thummel, a senior portfolio manager at Tortoise, which invests in “midstream” companies focused on energy transportation, storage, and marketing. The consensus among the group is
that oil prices could double in the next year or so, to about $50 for Brent, as the global economy reopens and crude supply and demand ease back into balance.
“ For companies to produce oil profitably, Brent needs to trade around $50 a barrel. ”
Barron’s conducted the 2020 Energy Roundtable in mid-April via Zoom, and followed up by phone with the panelists to get their read on ever-changing market conditions. Oil prices, for one, perked up last week, with June WTI futures jumping 25% on Thursday, while many energy stocks have rebounded by 40% or more from their late-March lows. Even so, our panelists consider stocks such as Chevron (CVX), ConocoPhillips (COP), Valero Energy (VLO), and Williams Cos. (WMB) compelling buys at current prices.
Patrick Kaser: There is an assumption that anyone looking to invest in energy stocks, and oil stocks in particular, is an idiot. [Laughter] That assumption appears pretty reasonable—if you’re looking in the rearview mirror. What will it take for the group to do well? Over the long term, things will normalize. In January, the industry was on a path to a pretty good environment. Brent crude was trading in the $60s. Supply and demand looked reasonably balanced, and excess capacity was lower than it generally had been in the past 30 to 40 years. We think things will get back there, but the timing is uncertain. The stocks have been destroyed. There will be survivors that come out on the other side looking stronger. Their shares are pretty attractive right now.
Phil Gresh: If you rewind the clock to December, companies with the right cost structure could thrive in a $60 Brent environment. They could cover their dividends fully. Oil companies were buying back stock with excess cash flow. They could compete with the S&P 500 on a cash-flow-yield basis—and then the oil price had a tumultuous drop.
How to trade Oil online Crude Oil trading is performed in the same way as FX or Foreign Currencies Trading Oil Is King – More people trade oil than any other commodity. Its importance in the world and demand is increasing due to China and India becoming increasingly important to the world economy. You can trade oil futures using options and commodities from anywhere there is a computer with internet service. Trading commodities like (Gold, Silver, Metals) or Dow futures is exactly the same as trading Forex Many Forex brokers also allow you to trade oil, gold and the Dow. Forex is mostly traded on the MetaTrader 4 platform and this often includes these instruments without people realizing. Most MetaTraders have all sorts of additional instruments, often shares and sometimes even including the DOW. To reveal these, you need to right click in the Market Watch window (where the currency pairs are displayed) and click on ‘Show All’. Trading, as opposed to buying shares, allows two big advantages. The first is that you can profit from falling prices just the same as rising prices, by selling first rather than buying. The second is ‘leverage’ which allows you to buy huge quantities with just a small deposit. You can make a profit from a small move up or down in price. This is potentially risky but like Forex Trading you always put in an automatic ‘stop loss’ to close the trade should the price move against you by a set amount. You can also put in an automatic ‘limit’ to close the trade. You can place the trades anywhere you like, including spread betting. The amount of capital you require varies from broker to broker but most will trade mini contracts but you need a minimum of a thousand dollars in your account. You can start trading with $100 (it is called micro account) but it is not a good idea! Futures prices are estimated price for delivery at a set date in the near future.
Here is how a typical trade for crude oil works. We see that the quoted price is 71.50 – 71.56 so this means that we can buy at 71.56 oil and sell at 71.50 – the difference in prices being the broker’s profit. In conclusion, trading oil for a living is not only fun but a profitable and flexible way to make income online.