Investing in the oil/energy sector

radioactiveman

Hi
I am just wondering what people think of oil stocks at the moment. What are the long term prospects for these companies?

There seems to be a common investment thesis, that these companies will outperform other sectors due to the fact that a rise in oil prices will a) increase profits directly for oil companies and b) increase costs of production for a lot of other sectors, like food, manufacturing, airline industry etc etc., where oil is an input, so that these sectors trade "sideways" and are negatively affected by the inflation caused by increased oil price..

This idea also seems to be based on the assumption that alternative energies will not be capable of providing a replacement any time soon.. but obviously if alternative energies do come onstream the outlook for oil companies is very bad.. :pac: ?
this would mean it's not as clear cut at all as it seems.. is it better in that case to just diversify as per usual in all sectors? this looks like it will be a key issue over the next 10/20 years..

soddy1979

radioactiveman wrote: »

Hi
I am just wondering what people think of oil stocks at the moment. What are the long term prospects for these companies?

There seems to be a common investment thesis, that these companies will outperform other sectors due to the fact that a rise in oil prices will a) increase profits directly for oil companies and b) increase costs of production for a lot of other sectors, like food, manufacturing, airline industry etc etc., where oil is an input, so that these sectors trade "sideways" and are negatively affected by the inflation caused by increased oil price..

This idea also seems to be based on the assumption that alternative energies will not be capable of providing a replacement any time soon.. but obviously if alternative energies do come onstream the outlook for oil companies is very bad.. :pac: ?
this would mean it's not as clear cut at all as it seems.. is it better in that case to just diversify as per usual in all sectors? this looks like it will be a key issue over the next 10/20 years..

I like oil because it has a low historical correlation to the S&P 500 and therefore provides good diversification benefits. It also moves inversely to the dollar which I like also.

As a long term play it might be a good bet but there definitely seems to be more capacity than demand at present so I personally would not be backing it to outperform in the short term.

silverharp

soddy1979 wrote: »

I like oil because it has a low historical correlation to the S&P 500 and therefore provides good diversification benefits.

did oil and the S&P not generally move in the same direction all this decade (it did outperform)? it depends on what the big picture is. Say we get a a new deflation wave over the next year you will have S&P and oil down and the dollar up.

Comordha

Have a look at some penny stocks, nice way to get involved.

Companies like Petroceltic, Petroneft, Victoria Gas & Petroleum, Aminex.

radioactiveman

the thing is though - should you get involved? If oil doesn't boom then it could be a fairly crap investment long term when alternative energies eventually take over. And if it does boom, regular investments might not be that good.

Comordha

In that case buy both. Oil does not necessarily have to boom for share prices to rocket. Anyway, OPEC will restore balance to the market one way or another regardless of supply levels, because they have to. They are currently producing below breakeven.

soddy1979

silverharp wrote: »

did oil and the S&P not generally move in the same direction all this decade (it did outperform)? quote]

Indeed, the annual return correlation is about 0.47 since 1999. It gets lower as you change your time horizons going to about 0.02 for weekly returns since 1986.

TTNYWWBM

One thing to consider, the Oil producing countries in the middle east, (Saudi Arabia for example) are almost unaffected by recession! If anything they can get their imports cheaper!

Eventually when the oil gets more scarce in the world the middle east will still be pumping, and charging more for it too.

I'd be very wary of those small cap stocks btw.

ixus

TTNYWWBM wrote: »

One thing to consider, the Oil producing countries in the middle east, (Saudi Arabia for example) are almost unaffected by recession! If anything they can get their imports cheaper!

Eh, do a little research on Dubai :rolleyes:

woodseb

ixus wrote: »

Eh, do a little research on Dubai :rolleyes:

in fairness, Dubai doesn't actually produce any oil, its big brother Abu Dhabi does and is doing fine in comparison

ixus

woodseb wrote: »

in fairness, Dubai doesn't actually produce any oil, its big brother Abu Dhabi does and is doing fine in comparison

mea culpa will have to do my own research!

Wiki

The emirate's main revenues are from tourism, real estate and financial services.[7] Revenues from petroleum and natural gas contribute less than 6% (2006)[8] of Dubai's US$ 37 billion economy (2005).[9] Real estate and construction, on the other hand, contributed 22.6% to the economy in 2005, before the current large-scale construction boom....
.......

Although Dubai's economy was built on the back of the oil industry,[70] revenues from oil and natural gas currently account for less than 6% of the emirate's revenues.[8] It is estimated that Dubai produces 240,000 barrels of oil a day and substantial quantities of gas from offshore fields. The emirate's share in UAE's gas revenues is about 2%. Dubai's oil reserves have diminished significantly and are expected to be exhausted in 20 years.[71] Real Estate and Construction (22.6%),[10] Trade (16%), entrepôt (15%) and financial services (11%) are the largest contributors to Dubai's economy.

TTNYWWBM

Eddie Hobbs, champions Dragon Oil, anyone know anything about D.Oil?

pog it

He's championing Petrobras in the last few months- since he first recommended them they have gone from c. $28 to 45$ at peak price since then, now they hover at just above $40. He said that he expects price to double before end of year (this was when they were going at c. $28 dollar range) so I guess $55 is what he is hoping for..

I just don't know if he meant at least that much, or if he expects even higher than that.

But it looks good for them in the peak oil scenario and it's so so hard to ignore these peak oil arguments!

I haven't bought Petrobras myself- I'm looking at cheaper stocks, but if they were to fall again I'd find them very tempty.

I'm a sturdy fan of Eddie Hobbs for years though. I only copped on to finance stuff since listening to what he said, personal finance advice, etc.