Profiting From The Rise In The Price Of Oil
As I mentioned 5 weeks ago when oil breached $115/barrel, demand for the black gold will cause the price to keep on rising. On Wednesday, I drove to USC where I had an interview at the Marshall School of Business for the full-time MBA program. While driving there, I heard that Oil had exceeded $133 per barrel. I had a great interview (where I spoke about my background, my interests, the state of the economy, what a moron George W. Bush is, and the current elections) and then proceeded to a friends’ place to spend the night.
I later heard that oil prices hit $135/barrel. That news was broadcast incessantly on all the news channels and I kind of felt that it was being overdone. Whenever everyones saying that the price of something is breaking all records, it usually pulls back. I think thats why the US Dollar had shown some strength this year. I woke up on Thursday and bought the ULTRASHORT OIL & GAS ETF (AMEX: DUG), it went up a dollar and I exited my position, happy to have made enough money to pay for my gasoline bill for this month.
After that I went to UCLA for a class visit. I attended a class on Risk Management. One of the case studies they discussed was a deal between Amoco (American Oil Company, which is now part of British Petroleum) and Apache (APA) involving the sale of an oil producing property. Amoco sold the property with a guarantee to pay Apache a certain amount of dollars if the price of oil dropped below a certain amount. On the other hand, they would participate in some of the profits if the price of oil exceeded a certain amount. This was managed through the use of Put and Call Options.
It was interesting to see how large companies managed to hedge the price of oil through options, and especially ironic since oil was all over the news that day. Its not too different from how you can hedge your own expenditures on gasoline and heating oil. If you’re bullish on the price of oil and are willing to bet on this movement, you can buy the United States Oil ETF (USO). You can also buy options on this too.
Similarly, if you’re bearish you can buy the ULTRASHORT OIL & GAS ETF (DUG). You can also invest in Oil Futures contracts, however, if you’re that brilliant I doubt you’d be reading this blog!
But making directional bets in any asset class requires a certain amount of knowledge, homework and commitment. Its much easier to invest in high-yield Canadian Income Trusts like ERF, PGH, AAV, HTE, PEY-UN.TO, etc. They pay out a pretty good dividend (over 8% for most of them) and that should theoretically go up as the price of oil & gas goes up. (I say theoretically since there is some uncertainty regarding the Canadian Governments’ taxation of these trusts, so there is a black cloud hanging over them).
So far I’ve been pretty happy with my investments. I had been buying more on dips. For those of you lucky enough to have bought AAV under $9 back in January, in addition to the monthly dividends, you’ve already seen a 40%+ appreciation in the stock price! (unfortunately I wasn’t one of the lucky ones!)
But there are many ways to profit from the economic news if you keep your eyes open. By the way, USC called me on Friday. I got admitted to their MBA program with a Fellowship (tuition remmission)! So now it’s time to decide between UCLA, USC and UCSD!
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May 25th, 2008 at 7:50 am
Wow, that’s a clever way to generate money to pay for gas. I never thought about that. You have been doing some pretty good posts on this topic lately.
May 25th, 2008 at 1:02 pm
Wow, the price of oil per gallon is finally starting to catch up with the rest of the world. What? Your suprised, angry, and kneading your eye sockets between your index fingers and thumbs. Why are you so surprised? This time in our history and continuing future has been foreseen and coming forward for decades; even centuries now and we have just chosen to ignore it. I’m feeling the hole in my pocket just like the rest of you, but in a way I’m a mostly optimistic. From chaos is bred new life. It’s going to take something like this to kick people into gear and realize fossil fuel isn’t the end all be all for alternative energy and fuel. We have had the technology to push ourselves forward for generations now, but do to the oil companies and lobbyists in Washington we’re still stuck in the past. WAKE UP CALL PEOPLE! It’s time to move on
May 25th, 2008 at 4:54 pm
George Bush is a moron? Wow, how original.
Way to ruin your post with demagoguery. Stick to the informative posts and leave the other to Colbert and Stewart.
May 25th, 2008 at 7:56 pm
Well, that’s my opinion. Despite being a republican, I think Bush is a senile fool. If you have a different opinion, you’re free to post it ON YOUR OWN BLOG.
If you don’t like reading peoples opinions, then stick to reading wikipedia.
May 25th, 2008 at 9:09 pm
Wow, that’s cool on the USC offer – you must be very good! USC Business School beats UCSD and I think the offers were the same financially? Only question is moving city then?
May 29th, 2008 at 9:46 am
I think there is a lot of money to be made for this “crisis”.
Best Wishes,
D4L
May 29th, 2008 at 8:01 pm
[...] off dividends wrote 2 articles which I think are very relevant at this era : 1. Profiting From The Rise In The Price Of Oil. 2. How To Invest In Foreign Currencies & Foreign Stocks. Please do your own homework before [...]
May 31st, 2008 at 1:35 pm
Nice site and good posts. I may try a little of your website style. Do you actually generate any income from the site?
My investing style ( and blog posts) are similar. I own PWE, PVX (good S CA oil company thru Breitburn merger), PGH, DAYYF (Daylight Energy), COSWF (Canadian Oil Sands), PSYTF (Pason) and have short put options on OIH, CAM and NBR. HTE and Baytex are also good choices. Needless to say, oil is where it is at, though I am building a position in solar (TAN) and water (CGW, GE and PLL). Using covered calls on the Canroys is not a bad idea, though “Out of the moneys” don’t pay much right now. Also look at selling OTM short puts when the Canroys go down in price.
Also, for a dividend oriented site, you may want to look into some of the high income closed end funds (paying around 10%). I have DGH (which is mostly a floating rate commercial note fund) and BDJ (which is a leveraged S&P500 type fund with covered calls on many of the stocks which are skewed to high dividend, so has a 38% financials weighting).
In my trading accounts, just for fun, I have tried shorting DUG and DIG, alternately, using the funds from shorting to margin my option trades. I haven’t made too much doing this, but it is fun to guess the market direction of energy each day. Same for UYG and SKF, the levered financial index funds. Financials are in a range with a wave that is about 10 biz days long each direction.
You are now applying to MBA school? You have mature opinions and thoughts for a grad school student (the Bush shot aside). Keep up the good work.
June 1st, 2008 at 2:07 pm
Hi Brian,
I make over $1000 a month from different sites. You can check out my Passive Income post.
I’m starting B school in the fall.
The Bush shot was my opinion and I spoke about it during the MBA interview. Apparently it resonated well with the interviewer as well because I got admitted with a fellowship!
June 7th, 2008 at 12:44 pm
[...] off dividends wrote 2 articles which I think are very relevant at this era : 1. Profiting From The Rise In The Price Of Oil. 2. How To Invest In Foreign Currencies & Foreign Stocks. Please do your own homework before [...]
June 8th, 2008 at 7:18 am
Carnival of Equity Trading #9- June 8, 2008…
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June 9th, 2008 at 5:41 am
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June 28th, 2008 at 6:38 am
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October 10th, 2008 at 3:44 am
Living Off Dividends – What is your take on the Canroys in this market? I am a holder of HTE and was wondering your opinion now with the drop in just about everything in the market. I won’t be selling my position now but am thinking of picking up some more.
October 10th, 2008 at 4:42 am
passivefamilyincome, if I can chip in here, too: I am heavily invested in Canroys and haven’t sold any. I have about 30% of my total investments in Canroys and I have been clobbered as a result (PWE, PVX, PGH and DAYYF are all down over 50% in the past two months). I don’t own HTE, but I have kept an eye on it. It trades about the same as those I do own (as does Baytex, another option).
Still, I believe the Canroys have a good long term outlook, as long as the global economy doesn’t disintegrate. Whenever, the economy comes back, so will energy demand, especially in Asia, which is still expanding. There is no additional supply in the works, so demand will once again outstrip supply.
The big question in the short term, is whether particular Canroys have protected their dividends by selling forward futures contracts on their production. PWE has sold almost all of 2009 and most of 2010 as of the 2nd quarter. Hopefully, the next quarterly report will show that 2010 is sold out and they are selling 2011 and beyond. This will buy time and allow PWE to keep paying its big dividends, which now yield over 20%. All the Canroys report the next 2-3 weeks. I will be reading their quarterly’s carefully.
October 10th, 2008 at 7:39 am
I’m holding on to my canroys even though they’re down 65%.
I wanted to buy puts on them before business school started but never got the opportunity.
If I wasn’t in school and working, I’d probably be buying more of them! but its hard to know when the bottom really is.