Here’s how to invest in oil — if you want to take a big risk
The oil market may look like a dollar-store clearance rack — but that doesn’t mean investors should buy up barrels like they’re out-of-season Easter candy.
Rock-bottom prices have piqued the interest of would-be oil barons who furiously googled tips this week on how to bet on crude. They could usually do that through exchange-traded funds and oil company stocks because buying actual oil is expensive and complicated.
But experts say now is one of the most dangerous times ever to invest in oil given the unprecedented turbulence in a market rattled by the coronavirus crisis and a glut of supply.
“Historically we’re seeing events in the oil market that never happened,” said Will Rhind, CEO of GraniteShares, which manages commodity exchange-traded funds. “So now would be a very risky time to invest in oil, the riskiest time perhaps ever.”
Google searches for terms like “how to invest in oil” and “how to buy oil stocks” skyrocketed Monday as US crude oil prices turned negative for the first time ever — a historic development indicating traders were actually paying to get rid of the stuff.
The idea of getting paid to hang onto a barrel of oil may sound appealing to everyday investors. But traders were actually dumping futures contracts, or agreements to receive physical barrels of oil due to arrive in May. The standard contract is for 1,000 barrels, each of which holds 42 gallons of oil.
That means someone who snapped up a negatively priced futures contract Monday would be expected to haul those 1,000 barrels away from a storage facility, such as the giant hub in Cushing, Oklahoma. If they couldn’t, they’d still be on the hook for the price of the oil plus interest or other penalties imposed by their broker, one commodities trader said.
They would also have to store the oil until they found someone to take it off their hands — an especially tough task at a time when warehouses are getting close to full, said Jared Woodard, head of the Research Investment Committee at Bank of America.
“If you buy a barrel of oil and you put it in your garage, one month later you have a barrel of oil sitting in your garage,” Woodard told The Post.
To avoid keeping 42 gallons of crude next to their lawn mower, everyday investors could buy shares of an exchange-traded fund, or ETF, that tracks oil prices. A popular example is the US Oil Fund, which is tied to the price of the current futures contract for West Texas Intermediate crude.
But the fund known as USO has plunged about 40 percent this week as oil prices tanked. One reason it’s in a rough spot is a market phenomenon called a “contango,” according to Alexander Craig, portfolio manager at Tiverton Trading.
That’s when futures prices for further-out months are higher than the current price of oil, forming a steep upward curve when charted on a graph. That makes it more expensive for the USO to buy the next month’s contracts after the current ones expire, Craig said.
“The problem is the front of the curve is in the toilet and it’s gonna stay in the toilet,” Craig told The Post.
Another way to invest in oil is to buy shares of oil companies. Experts say the safest bets are major players like Exxon or Chevron, which are better positioned than most to weather the current storm.
But such stocks have their own risks, such as a growing shift toward electric vehicles and other environmentally friendly infrastructure. Moreover, it’s uncertain when the price crash might end as coronavirus-related lockdowns keep demand for oil low.
Investors “shouldn’t expect that just because things are cheap or prices are down that things are gonna bounce back,” said Lamar Villere, portfolio manager of the Villere Balanced Fund.
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