Should I Invest In Oil Stocks? Learn About Oil Price Fundamentals First

Oil price collapseOil is a popular topic due to its surprising ~60% price drop from June 2014 to 1Q2016. Nobody could have imagined such a quick collapse in oil. I certainly didn't when I decided to buy a Honda Fit instead of a Jeep Grand Cherokee Limited last summer! If I had known I could pump my rolling 4th bedroom for less than $2.50 a gallon, I might very well have opted for the bigger car.

Given knowing what the hell is going on in the world is part of being a functioning citizen in today's society, I decided to do some research into what happened. After all, I did purchase the oil ETF USO, a couple major integrated oil companies, an airline stock, and some auto stocks in my newest diversified investment portfolio for 2015 to try and make some money.

So what caused this significant drop to ~$30/barrel, and how does this affect businesses, the economy, and our everyday lives? Is oil poised to rise once again? Let's explore these questions and more.

Contributing Factors To The Decline In Oil Prices

There's no single, clear-cut answer as to why the price of oil has been dropping. As with other important occurrences in history, there are a wide variety of reasons for the decline. Here are four of the reasons.

1) Declining Demand

Even though the financial crisis is over, the current state of the economy is below where some hoped it would be by this point. The economic outlook for 2016 is tepid, especially now that the Fed has raised rates, acting as a breaking mechanism for growth. Low oil prices can very well be a signal for weak global demand. Weak global demand may lead to weaker corporate profits, which leads to a decline in the stock market. Everything is rational in the long run. If there was robust demand, oil prices would be higher. Demand is also lower due to increased efficiency, and a growing switch to other energy sources.

2) Turmoil is not affecting output

While there has been political turmoil in Libya and Iraq, their production of oil at nearly 4 million barrels a day has not slowed down. Despite the tension, these two countries combined are still managing to produce four million barrels of oil every day. If there were to be a significant drop in supply in their production, oil prices could rise. However, the markets do not appear to be anticipating a large drop in supply due to the geopolitical risk between Iraq and Libya at the moment.

3) America has become the largest oil producer

If one was asked to list the major oil producers in the world, America may not come to mind. But the truth is the U.S. is now the biggest producer of oil, overtaking Saudi Arabia and Russia. We've been extracting energy from shale rock with a fury. Each day, the United States produces over nine million barrels of oil, which is approximately 12% of the total world’s oil production. Since the U.S. does not export crude oil, and is importing less, there is more U.S. supply and decreased global demand. This has naturally led to oil price declines in the U.S. markets.

4) The Middle-East has not curbed supply

In addition to the United States’ increased production of oil, the Middle-East (via OPEC) has also decided not to limit their production of oil either. Since it's cheap for countries like Saudi Arabia to produce oil – for as little as $5-6 per barrel – their concerns for production costs are minimal. Saudi Arabia also has an estimated $900 billion in reserves. There is limited incentive to reduce their reserves since other countries would likely benefit more if they chose to curb supply.

What Products Are Made From Oil?

Oil is an input cost for a tremendous number of things I bet many people don't even realize. Let’s start out in the kitchen. Here are some everyday items that can be manufactured using oil:

  • Coffee pots
  • Drinking cups
  • Egg cartons
  • Dish sponges
  • Formica counter tops
  • Ceiling tiles
  • Trash bags
  • Cooking utensils

Other areas of interest that can be comprised of oil:

  • Car dashboards
  • Upholstery
  • Windshield wipers
  • Brake fluid
  • Computers
  • Telephones
  • Memory chips
  • Roof shingles
  • Pillows
  • Blankets
  • Guitar strings
  • Tires

The list really could go on and on. Basically, oil is used to produce plastic, textiles, data devices, and even steel. Thus, one can start to see how oil is an important commodity for many more reasons other than just moving one’s car or private jet from Point A to Point B.

Which Countries Are The Major Oil Producers?

Since the U.S. produces more oil than anyone else in the world, the Middle-East is no longer the oil producing powerhouse that it once was. As of 2016, the top 5 countries that produce oil are the United States, Saudi Arabia, Russia, China, and Canada. Together, these countries produce over 47% of the world’s oil supply.

However, while the Middle-East may not produce the amount of oil that it used to, their reserves more than make up for it. OPEC (Organization of Petroleum Exporting Countries) currently houses 81% of the world’s proven oil reserves, 66% of which are in the Middle-East.

OPEC Share Of World Crude Oil Reserves

The History of Oil Prices

The United States has seen two noteworthy oil price spikes in the last 50 years. The first is often referred to as “the energy crisis of the ‘70s,” when the U.S. was consuming a huge percentage of the world’s energy as a proportion of its population. Domestic oil production was decreasing, which made the U.S. overly dependent on foreign countries to supply us oil. Not surprisingly, this led to an OPEC oil embargo on the U.S. (also for political reasons). Supply was immediately limited and the price of oil shot through the roof.

In 2008, the second spike in oil occurred (as seen in the chart below); only this time the reason was not as easily deciphered. There was an apparent oversupply of oil in the U.S., but reports of Iraq cutting off the U.S. from their oil supply, and talk that oil could soar toward $200 a barrel, was apparently enough to quickly send the price of oil skyrocketing. After the dust settled, and as the economy worsened, the price of oil overcorrected and landed at a lower price than when the spike first began.

Goldman Sachs Oil Trends Chart

The chart above shows a distinct similarity between the aftermath of the ‘70s and the oil price trends today. If the trends repeat themselves, oil prices may continue to fall in the short-term, and then could level out in the longer term. Of course, as many have witnessed in the past, a slight economic shift or political embargo could easily disturb the trends.

The Various Ways to Invest in Oil

One of the easiest ways to gain exposure to oil is through oil ETFs. Here's a list of the 10 most popular ones below.

Top oil ETFs Chart

In my after tax investment portfolioI decided to buy USO, Exxon Mobile, and Chevron Corp for a 12% overall weighting. For comparison, the S&P 500 has a roughly 10% weighting in the Energy sector. In essence, I'm overweight Energy after the decline. Remember, when you're building a diversified portfolio that is trying to beat some index of your choosing, it's important to think in relative weighting terms.

Black Gold: If you want to play the recovery in a more conservative manner with large cap, integrated energy plays with high dividend yields and large balance sheets. Some of the current holdings include Exxon Mobil, Royal Dutch Shell, Chevron, BP, Total, ConocoPhilipps, PetroChina and many others.

Shale Oil: If you want a more speculative oil motif with much higher beta. New horizontal drilling practices, including fracking, have greatly expanded the ability of US producers to profitably recover crude from domestic shale reserves. This motif’s holdings include Hess, Pioneer Natural Resources, Murphy Oil, Bonanza Creek Energy, Continental Resources, Apache, and more. This motif is down 24% over the past one year has a 0.8% dividend yield, and trades at 45X P/E.

Frack Attack: This motif contains stocks of companies that provide fracking technologies and services to oil and gas developers. Hydraulic fracturing technology has breathed new life into the natural gas industry, boosting production and driving down prices – even as environmental concerns mount. Natural gas could supply 25% of US energy needs by 2035. Names in this motif include Halliburton, National-Oilwell, Kirby Corp, Helmrich & Payne, FMSA Holding. The motif is down 28% over the past 12 months, but has a 1.9% dividend yield and trades at a surprisingly low 14X P/E multiple.

Oil Play motifs


Perhaps the need to build knowledge is the reason why more people don't invest. Furthermore, you can gain all the knowledge in the world and still get your investments wrong. Because there's $10,000 at stake of my own money, I spent a lot of time thinking about the investment back story behind each of the 30 positions. It's much different if we're talking play money or when money is given to you to invest.

Now you know four reasons why oil prices collapsed, why oil is important in our day-to-day lives, who the world's largest oil producers are, the 11-year history of oil prices, and how to potentially profit from oil in case of a rebound. The question everybody is wondering now is whether oil prices will stay at these low levels for an extended period of time, go lower, or rebound higher.


The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing and how my net worth is progressing. I can also see how much I’m spending every month.

The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There's no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?

Retirement Planner Personal Capital
Personal Capital's award-winning retirement planning calculator. Are you on track?

About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $175,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.

Updated for 2019 and beyond.

About The Author

55 thoughts on “Should I Invest In Oil Stocks? Learn About Oil Price Fundamentals First”

  1. Pingback: Motif Investing Investment Portfolio Review 1Q2015 | Financial Samurai

  2. Pingback: How To Make Six Figures A Year And Still Not Feel Rich - $200,000 Income Edition | Financial Samurai

  3. I work for an offshore seismic exploration contractor. Basically, major oil companies contract us to gather 3D images below the seabed and produce data about potential new oil/gas fields. However, exploration of new fields is a luxury oil majors will only spend money on when the industry is bullish, as a result all offshore seismic contracting companies are getting less work. My company is trading at 1/8th of the share price we had 12 months ago. Everybody i know has bought as many shares as they could afford, and planning to hold them 1-3 years. It’s a bad time to work in this industry, but a great time to invest!!!

  4. I work in the oil industry. One reason to buy an integrated oil stock like XOM or CVX in a down-oil market would be for the dividend. You can fetch sometimes close to 4% and the top 2-3 companies never lower dividends. They will do almost anything before resorting to that and their CEOs and heads of investor relations have said as much. It’s pretty much the safest dividend in the entire equities market. Over time, you should also gain on share value through stock buybacks and general growth. In the short term, anything can happen to share price. But if your holding period is forever or decades, it can be great to “lock-in” those high dividends when the stock is cheap.

  5. Hi sam,

    Nice analysis here. I think a fairly big crowd here believes in oil going back up in the long run. This probably puts me in the minority who thinks that oil might be heading back down: lower demand, supply cuts seems far off etc.

    I’m not exactly an expert as well but I thought these might be some points worth considering.

    1) steep contango in the term structure of oil futures which are what uso holds

    2) many of the oil majors still seem priced for $100 oil.

    Hope this was useful

  6. Gen Y Finance Guy

    I am a buyer via short puts or covered calls in the following oil related ETF’s: USO, OIH, and XOP. This collapse in oil prices has made made for a very good opportunity to sell premium at elevated levels. Implied volatility levels make selling 10-month (Jan 2016) out of the money puts attractive by yielding 12-20% return on risk for cash secured puts.

    For example, today you could had sold the USO January 2016 $18 put for around $2.60, thus yielding about 17% return on risk for 10-months.

    Worst case you are wrong and oil continues falling and you take delivery of USO at a cost basis of $15.40/share.

    I like this play better then just buying the ETF for 2 reasons:

    1) It helps mitigate in the case of USO any drag due to Contango in the oil market.


    2) It gives me more than one way to win if my thesis isn’t exactly right. I think prices will be at least 10% higher 10-months from now.

    This position makes money at any price higher than the break-even at $15.41. If oil goes up from, here I make money. If it stays exactly where it is, I make money. Even if it goes down a bit more I can still make money.

    Now obviously the trade off is that if oil rockets higher by like 30-50%, the maximum return I can make is 17% or the premium I received from selling the put.

    Always lover opportunities like these to take advantage of fear via fat implied volatility that leads to inflated premiums to be had in the options market.


  7. Really helpful post Sam, thanks! It sure has been nice to see lower gas prices and now I know why. I had no idea the US was that big of a producer, wow! And I never really thought about how oil is used in producing so many different products across a ton of industries. Great insights!

    1. In 2007, the Mississippi River had a little less than 2 million barrels of crude oil shipped down it. Last year (2014), over 50 million barrels. Just to show you just how much we’ve increased our production.

  8. Above Average Black

    I’m negative on oil long term. My hope is that majority of cars in the US are electric 20 years from now. A portion of my portfolio reflects this belief and therefore I do not hold any oil companies as a result. I hold solar ETF to compensate for my longterm oil negativity and lack of including the sector in my portfolio :)

  9. Great analysis Sam. I must admit, after the initial price shock, I dived in and bought a couple of oil stocks in a purely contrarian play, without as much in-depth analysis. I just feel that many of these shocks tend to result in over-reactions to stock prices, and in the long-run things will revert back towards the norm on average.

  10. I bought Chevron, Exxon and VDE about a month ago. I’ve sort of been wondering if I made a bad move, but I guess you win some and you lose some. I plan on holding them long term, so hopefully it will turn out ok.

    From an environmental stand point, I am sad to see oil prices go lower! I would like prices to go higher to encourage people to buy more efficient cars and reduce energy consumption. You know, climate change and all…. Plus, my Tesla stock! Although, low oil prices haven’t seemed to have hurt Tesla.

  11. Marcus Boehler

    I bought a few rounds of UWTI the first of the month and this week. 3x Leveraged oil ETF…

    I’m young and like risk and it’s a small percentage of my net worth. I’m willing to lose it compared with what I think is the upside opportunity. Anyone want to join the roller coaster, UWTI is 3x the gains (and losses) of USO. This is long term for me as well. Oil back over $100 a barrel before I sell. Good luck to all the oil tycoons out there.

    1. Marcus Boehler

      One more thing on reasons for price change…I think this has been, on the majority, over supply. Prices were so high it made new production possible. Fracking was born. The U.S. became the largest producer in the world. And prices had to respond. HOWEVER, just read about the lifetime of a fracking well….they lose nearly half their production in the first year. Something like 75% after 2….fracking can only be maintained at a certain price point. All the US shale are scrambling right now and begging OPEC and Saudis to limit production to boost price. But Saudis and OPEC know they are squeezing the Shale folks and want to continue. If prices persist at current rates…it will cause big problems in US shale eventually bankrupting the producers and spurring U.S. production. I just don’t see prices going anywhere but up and back to old levels long term.

      1. Gotta love the risk taking on the 3X leveraged USO! If you got money to lose, then go for it. No risk no reward.

        You’re right about artificially high oil inviting new ways of producing by the US. It’s all Yin Yang rational economics.

        Now with prices back down to $50, new productions will stop… new innovation will stop… b/c why bother? Profits just got crushed.

    2. Just want to make sure you’ve read the prospectus, and know that the long-term value of UWTI is zero because of the rollover penalty of the underlying options. This is not a long-term hold vehicle, and is permanently weighted against you. Hope that helps!

      1. Yes, leveraged etfs have inherent time decay and are best as short term trade for event driven movement. I really don’t think we’ll see an upward movement until spring and I doubt we’ll be over 75 by the end of the year, barring geopolitical turbulence.

        1. marcus boehler

          Thanks for the info. I am reading the prospectus now and was completely ignorant about what it actually does. I just thought it would be 3x whatever USO would be and evidently am big wrong. Like you’s just made for intra day trading and not to be held more than a day. I don’t quite understand yet how the daily penalties or adjusting works…but will probably liquidate my position since I can’t hold them longterm reliably. Live and learn..thanks for the help.

          1. I wouldn’t recommend leveraged ETF’s to the regular investor, they are pretty complicated products. A simple example to illustrate your 3x ETF (assuming it’s replicating daily returns)

            Starting prices

            USO Price: $100
            UWTI Price: $100

            Day 1 – USO goes up 10%, hence UWTI goes up 30%

            USO Price: $110
            UWTI Price: $130

            Day 2 – USO goes down 10%, hence UWTI goes down 30%

            USO Price: $99
            UWTI Price: $91

            As you can see, USO is down 1% after the two days, but UWTI is down 9%!! This gets hairy very quickly if you hold for a long period of time as you can lose a crazy amount of money even if USO is unchanged a month later. Essentially, the returns you will realize are path dependent and not intuitive for the regular investor.

            1. I tried calculating the Daily Investor Fee…the prospectus was too turgid for me to figure out. Anyone able to make those calculations or give an estimate?

              I follow the logic for a few steps but then it will bring in the Closing Indicative Value and Daily ETN Performance and Daily Accrual compared with the 3 month T-bill…it’s comical how convoluted they make it. Each calculation requires a component with it’s own terms and seperate calculation. lol

  12. I am surprised you didn’t mention XLE or XES.

    You can look at these smaller pure play E&P’s as a microcosm of the larger unconventional bonanza which skyrocketed domestic production to 40+ year highs: Utilize relatively cheap capital to exploit a repeatable resource play. Take your company public during a rising tide of wall street enthusiasm. Feed the beast by embarking on a capex treadmill which requires you to constantly run faster and faster so as to overcome the decline rates in your corporate production profile. Constantly grow your rig count to feign growth for investors while functioning outside of cash flow the entire time. And then the music stops.

    There is a significant lag between commencement of drilling and oil finding its way into the marketplace. We’ll likely begin to see an alleviation in domestic production in March or April. As well, much of the new US production has extremely high decline rates; hyperbolic. Those decline rates will show up quickly and add to volatility. However, the manufacturing process is so well refined that the E&P’s can deploy rigs just as quickly as they are now drawing them down.

    Libya is turning into a geopolitical wildcard and they produce about the same amount as the current global supply surplus.

      1. Austin is right and drilling is waaaayyy down. I work in the land department of a major company and we’re just walking on eggshells every day because there is nothing to do. Well, there is plenty to do but no budget for it and only one drilling rig scheduled for the rest of the year- and we’re not talking a mom and pop wildcatter company. I don’t mind paying a little more for gas to keep my job!

        1. Gotcha. What is your break even cost per barrel in order to reignite the drilling machine?

          I wonder what other opportunities lie in wake of this oil price collapse. Texas housing? I’ve always wanted to pay no state income taxes.

          1. That is above my pay grade, ha. Plus it is such a complicated question. Are we talking the East Texas Field? Or Midland? Or our holdings in other states? Is it a new shale play, or a steady but low daily producer that’s been going since 1980? Do we have to drill a horizontal or vertical? How deep is the well? Have we had to pay two years worth of title work plus getting rigs scheduled, etc etc? There is so much of a trickle down effect and a lag between what we are getting mineral title on (like I said, I’m in the land department which is mostly title work) and actual drilling. Leases that we got last year might not get drilled until 2016 (or never). You pay a contract landman $400-500 a day or more in heavy, competitive areas, then you buy leases from the mineral owners, and you have salaried in-house landmen, then you pay an attorney to get you a Title Opinion and then it leaves my wheelhouse to the engineers and E&P departments.
            As far as the local economy goes, I’m only speaking for my area of the state and remember, Texas is big…it sounds silly but little things like the country clubs are preparing for lower revenues by losing 100 landmen or so that are members. Currently, real estate is a seller’s market and new listings are selling fast but that could change soon. The landman brokerage firms are laying off 80-100 people..etc. Wow, now I’m just rambling, ha. I’m not sure if any of that was helpful commentary!

            1. I surmise you are likely in Midland. Don’t worry, those home prices will get slammed soon enough. Broker, G&A, G&G (geologic and Geophysical) and title opinions are not factored into well economics. It’s only completed well costs and LOE (Lease Operating Exp.) net of a depreciation and based on a strip price determined by whoever wants to run the economics.

              So, when the CEO of PXD/CXO/FANG etc says that they are ROR positive at $60/bbl. They’re kind of lying. Here’s the secret. They don’t care because the SEC tells them what offsetting PUDs (Proven Undeveloped) they can book with proximity to their PDP (Proven Developed Producing).

              When you enter a “multi-stack” shale world you’re not only talking about booking PUDs horizontally (two dimensional offset) but also vertically (three dimensional offset). So, I think it was PXD’s Q3 ’14 presentation which said they had >22,000 probable locations (Spraberry, Wolfcamp A B C D). Probables are not bookable by SEC standards, but it’s still a que to the investment community.

              Bottom line, these guys are about to take huge borrowing base write-downs. In time they will also take huge PDP/acreage value write-downs. Little guys like CPE… I dunno. Maybe bankruptcy.

            2. Austin- I have nothing to add to your thorough explanation except that I’m in East Texas, nowhere near Midland ;)

  13. One of the more interesting things I get by tracking my auto expenses is a great record of gas price fluctuations over time. Here in Los Angeles, gas prices have already rebounded quite a bit from their bottom. On January 17 I got gas for $2.339, and this morning I got it for $3.039 at the same station – a 70-cent jump in 5 weeks. At the beginning of July, it was $4.179, so in the span of less than 8 months it dropped $1.84 (44%) and then rebounded by $0.70.

    1. Wow, that is a big jump. In SF, prices got down to about $2.40 where I am and have rebound to $2.7-$2.80.

      It would be nice to buy barrels of gas and sell it in the future wouldn’t it? That’ exactly what oil futures traders do, with no physical delivery.

  14. Sam, how do you get around the contago effect with the ETFs? I learned a horrible lesson with UNG and now I am wiser

      1. Nothing dramatic. I bet that nat gas would go up which it did but my UNG kept dropping. Booked a 10 k loss when i understood why and resolved to not trade oil and gas through ETFs

  15. It seems crazy to me how such an important commodity as oil can remain stable for around 4 years and then suddenly drop off the cliff so quickly. The overall economy, the demand for oil, geopolitical tensions, and oil supply didn’t change that quickly in the latter part of 2014 to cause such a precipitous drop in such a short timeframe. Something in the human psyche did. It’ll be interesting to see how this plays out in the coming years.

  16. I did a lot of reading on various websites and there is one article that made the most sense to me logically about where the price of oil is headed. Basically it stated the cost of a barrel of oil will eventually rise to the cost of the last barrel of oil produced. So although a lot of countries can produce for real cheap, that last barrel of oil demanded costs something like $90 dollars to produce.

    I bought some American Airlines stock to capitalize on low oil prices and then will hopefully switch that investment to something that will track oil on the way up.

    Have you overlapped USO price on the history of oil price graph? I was looking at some of those oil ETFs that use futures contracts and it seemed like they followed the price of oil on the way down, but not as good on the way up. Something called contango which I don’t fully understand. Basically selling their monthly futures contracts for cheaper than they have to rebuy them when the market is going up?

    1. I’m not sure if that makes sense. The price of oil will go DOWN to theoretically the lowest cost producer because everybody else will shutdown along the way as it becomes uneconomical to drill/develop.

      Good point on contango and the ETF not following oil over the long run. May have to write another post as I see others inquire!

      A situation where the futures price of a commodity is above the expected future spot price. Contango refers to a situation where the future spot price is below the current price, and people are willing to pay more for a commodity at some point in the future than the actual expected price of the commodity. This may be due to people’s desire to pay a premium to have the commodity in the future rather than paying the costs of storage and carry costs of buying the commodity today.

      1. It’s similar to what you stated…No country/producer is going to produce oil for the long run if it is losing money on each barrel. The argument, which may or not make sense, is basically this:

        Country “A” can produce oil for cost of 25 dollars a barrel – produces 25 million barrels per day.

        Country “B” can produces oil for cost of 50 dollars a barrel – produces 25 million barrels per day.

        Country “C” can produces oil for cost of 75 dollars a barrel – produces 25 million barrels per day.

        Country “D” produces oil for cost of 90 dollars a barrel – produces 25 million barrels per day.

        World demand/consumption is 100 million barrels per day. World will theoretically have to pay 90 dollars per barrel of oil for there to be 100 barrels per day available. If price of oil drops to below 90 dollars per barrel Country “D” will stop producing and supply will fall below demand. Demand for 100 million barrels per day will push prices back up until Country “D” starts producing again. Therefore the price of oil has to be at least the cost of the “last barrel” produced by Country “D”.

        Thanks for the definition of contango, I think an article on it would be great, especially one related to oil ETFs!

  17. I experienced something very surprising investing in oil stocks. I inherited some CVX, then also bought Vanguard and Fidelity energy mutual funds. Over the several years I held these, the oil stocks did very well. The CVX I held greatly increased in value through dividend reinvestment and increased share price, but I realized no gains from the mutual funds. The underlying stocks did very well, but all the gains were consumed by management costs – and these mutual funds are no load/low expense funds! Mutual funds (ETFs, too) have to churn to match their indexes/benchmarks, generating significant trading costs. This also means the managers often have to buy high and sell low. For the stocks I own, I may only incur trading costs a few times per decade, and all the gains accrue to me. IMO this trumps any advantage of better analysts and diversification that mutual funds/ETFs provide. Along those lines I remember a news story from several years ago that Blackrock stock did better than any of the Blackrock funds. Just sayin…

    1. Management fees are definitely a drag on return. For $9.95, I build a 30 position stock/ETF portfolio and plan to only rebalance twice a year. Maybe I’ll rebalance 4 times a year, but twice is my objective. That’s $20 on a $10,000 portfolio for 0.2% expense. And it will go down as the portfolio grows. That’s a damn good value proposition Motif is providing.

  18. Great information.

    I think the time to pull the trigger would have been about 4-6 weeks ago, when people on financial forums were calling for $25/barrel oil.

    Long BP baby!!!

    1. $25/barrel oil would be amazing. I think I’ll buy the Range Rover Sport Supercharger if oil gets there… and then buy all the luxury automobile stocks there are. I currently only have Hyundai Motor and Fiat in my motif portfolio.

  19. Mrs. Maroon

    In my opinion, oil prices – and all other energy sector companies – will go up. It may not be tomorrow. It may not even be this time next year. But our global economy is built around petroleum products. The prices will recover. Based on that, we chose to move some investments to an energy-sector index fund during this downturn. We are pleased to sit on it for as long as it takes, but I am personally confident that the move will pay off for us in the end.

  20. Wall Street Playboys

    Ha! Great timing we do a full sector overview on the O&G sector from an investment perspective.

    The long story short: if you think oil is going to go up you buy E&P companies (exploration and production)

    If you think oil prices will remain down/trend lower be more exposed to refineries.

    Finally, as you know, in theory oil prices being low means airlines should do better if ticket prices remain stable.

    Good luck investing everyone!

  21. Thanks Sam, love your work!

    I have a decent understanding of oil fundamentals overall and what drives the price of oil. However, in terms of investing, how can you be reasonably confident that lower oil prices will not persist for a long period of time due to increased efficiency and a supply that doesn’t seem like it will be decreasing for a while? With stocks there are various fundamental calculations you can do (discounting future cash flows etc) to get a ‘price’, and also they tend to be inflationary as you have mentioned many times. With oil, I don’t see why the long term equilibrium cannot be close to $15? Or $20. I just don’t see a fundamental reason this cannot be the case. Would love to hear your thoughts!!

    Thanks again for the blog, it’s the only one I read consistently and believe in the high quality of the content (hence my question).

    1. It could be. It could also settle on an equilibrium of $100. No one knows. We can make educated guesses, but we would be basing that on factors that we have no certainty will exist. Will there be more mideast turmoil? Will the economy grow or contract? Will fracking become more productive? Will more fields be discovered or available for drilling? Anything is possible. I would not bet on $20 oil for the long term, but neither would I be surprised if that occurred.

    2. SS – Nobody knows what the long term moving equilibrium for oil prices is. I would happily bet that price will not be $15-$25 though! You’ve got multiple factors propping up oil: 1) oil is a finite resource, 2) population and overall demand should still be up and to the right, 3) artificial supply constraints.

      Of course, you have the four reasons during the shorter term which is causing prices to plummet.

      Investing is a calculated bet. Buy low, sell high right? I never invested much in oil at all, but decided after the 50% correction to take a position, and a slightly overweight position at that in my diversified portfolio. I think at current levels, my risk/reward is positive. I don’t think oil prices will decline by more than 10%, and I’ll collect my dividend as I weight for a potential recovery. I’m not going risky. I’m buying a couple of the largest integrated oil companies in the world.

        1. It could be remotely possible that Buffett is actually accumulating XOM similar to how he recently acquired DE while not disclosing his position. I think in Nov. 2013 DE disappeared from the 13-F and everyone thought he sold out the position but then DE showed back up in an amended 13-F the following quarter. Come to find out he got some kind of special exemption from disclosure. What better time to accumulate than when the stock is being beaten down due to the perception that he has given up on it. Just a thought.

  22. Lower gas/oil/fuel prices means more money in my pocket, which can be invested or to pay down the mortgage. I’m interested in motif trading, but still researching–haven’t yet “taken the plunge”.

    Thanks for a great, well-researched article (as always!), Sam!

    1. No problem. I, too, love the decline in oil prices. Like getting a tax break. The irony is, I would have gotten a bigger tax break if I kept Moose (my 2000 Land Rover Discover II), or bought a Jeep Grand Cherokee or Range Rover! Alas, I went the economic route with Rhino, my Honda Fit, whom I love dearly.

      Probably a good idea to calculate your monthly savings due to lower oil prices and be disciplined to use that to pay off debt or invest!

Leave a Comment

Your email address will not be published. Required fields are marked *