With crude oil trading the lowest it’s been since 2009 there are a few things you can do today to capitalize:
As Jerry Reed says in his song “Lord, Mr. Ford“:
Well, if you’re one of the millions who own one of them
Gas drinking, piston clinking, air polluting, smoke belching
Four wheeled buggies from Detroit City, then pay attention:
Now is a perfect time to load up the family and take a road trip. A penny saved on gas is worth more than a penny earned (considering taxes).
If the price of oil remains low, many sectors stand to benefit from the cost savings to their business. Obvious candidates include shipping, airlines, and retail. Oil revenue dependent companies should be avoided if low prices persist, such as drilling support and manufacturing companies.
If you think the oil price is bound to jump up sometime in the near future then you can buy oil futures, or if you have a regular stock brokerage account you can trade in exchange traded funds (known as ETFs) which base their performance on the performance of the oil price.
Two of the most popular of such funds are ‘UCO‘ and ‘SCO‘. UCO aims to emulate 2x the positive price change of oil, while SCO aims to emulate 2x the negative price change of oil. Take a look at the performance of these two funds over the past six months.
As you can see, UCO has been hammered by the fall in oil price over the past six months while SCO has climbed over 250%. If oil stages a large rally then UCO has a lot of upside potential – while SCO has a lot to lose. Four potential strategies that would benefit from a oil price increase include the following:
- Buy call options for UCO
- Buy put options for SCO
- Buy long UCO
- Sell short SCO
Outside of purely playing the oil price movements with these ETFs, you can also consider buying companies that have been hammered by the lower prices. This strategy involves more risk because companies have the possibility of going bankrupt and bringing their share price to zero, while the oil price will never reach zero until a revolutionary technology make it obsolete (and that transition time would be formidable).
Oil behemoths are more likely to survive a sustained weak oil price than smaller more leveraged companies. Some of these giants include:
- Exxon Mobil Corporation (XOM)
- Chevron Corporation (CVX)
- Royal Dutch Shell (RDS.A / RDS.B)
- BP (BP)
Smaller players that may return a better yield if a oil rally occurs include:
- ENSCO (ESV)
- Transocean LTD (RIG)
- Seadrill Ltd (SDRL)
- Northern Oil & Gas, Inc (NOG)
Whether or not the oil price remains cheap, recovers, or falls even further there are always ways to profit from it if you take a certain degree of risk. Given the deflated state of oil, it’s large but limited supply, and the motives behind the price bullying of American oil operators by OPEC I think oil will stage a moderate comeback in the next few months (make sure to read my disclaimer below).