HBD investing: buy oil

In Israel, they are talking about attacking Iran in order to stop them from building a nuclear bomb. Remember the proverb, where there's smoke there's fire. Any type of war involving Iran and Israel or Iran and the United States is going to cause a big increase in oil prices. This is why it’s a good time to buy oil.

Some people may insist that that the market is “efficient” and therefore the risk of war in the Middle East is already factored into the price. But it’s my belief that markets are actually not that efficient when it comes to factoring in macro-trends like this.

The majority of my life savings are invested in individual oil and gas stocks, and the stocks I am most heavily invested in are: PXP, DNR, COP, CWEI, TOT. You could also buy the XOP exchange-traded fund if you want less risk. If you want more risk, you could play the futures markets, but I don’t do futures (although maybe I should).

This has been a public service announcement from Half Sigma

Comments

[Turambar]

You are vacationing in Israel!?

I hope you are at least picking up a wife...

[Turambar]

Btw, wont the management of TOT be preoccupied with plans to move out of France.

Pretty brave posting a portfolio, since you make yourself a target of telling you what an idiot you are. But I find it interesting.

[Devin Finbarr]

The problem with buying oil stocks, is that oil companies are in the business of converting very valuable liquid energy into green pieces of paper. Longer term, if oil becomes more scarce, those oil company stocks won't be that more valuable because the oil companies reserves might be running dry. What I really want is to buy an oil investment trust - IE - some sort of fund that simply holds the oil in the ground long term.

[Doug]

" But it’s my belief that markets are actually not that efficient when it comes to factoring in macro-trends like this. "

Agreed. When it comes to stock selection there's 3000 stocks out there at any given time. It won't take too long for good stock pickers to distinguish themselves from random noise. When they size up they'll push the single stock efficiency back to zero.

In contrast at any given time there's really only 5-10 truly independent macro themes to bet on. So it's idiot macro traders can survive a lot longer than good macro traders. This aspect of the market stays relatively inefficient.

[Genxgotham.wordpress.com]

If hostilities broke out, Iran's game plan is to sink as many oil tankers in the Persian gulf as possible. I've read gas prices could shoot up to $10/ gallon. That sort of shock to the economy would break the economy. We would see gas rationing and a lot of mayhem would ensue.

[Kaz]

If we get into another fruitless war in the middle east.. god damn..

[ATC]

HS, has the fracking boom changed your views about peak oil?

[The Undiscovered Jew]

"Any type of war involving Iran and Israel or Iran and the United States is going to cause a big increase in oil prices. This is why it’s a good time to buy oil."

An oil play makes sense only as a short term gambit because an air attack on Iran won't be sustained long enough to cause macro changes in the energy sector. Rather, Israel's airstrike would, at most, last only a few days and target only a handful of nuclear sites.

In the long term energy prices will drop because fracking in the US and around the world will create an energy glut. US energy production in particular will enjoy a golden age if Romney wins the election and opens up the US to extensive energy production. A brief Israeli airwar with Iran will not alter the coming revolution in energy.

[The Undiscovered Jew]

And, Sigma, please blog about accelerated bachelor degrees and the college bubble in general.

According to the Wall Street Journal, even the middle and upper middle classes are struggling to afford college.

60 credit bachelor degrees with no gened requirements would cut tuition in half and strip leftist liberal art departments of most of their funding:

http://online.wsj.com/article/SB10000872396390444246904577575382576303876.html

[CUELA]

Oil eventually is going to become less of a factor as other power sources come online. The question is whether or not there will be disruptive changes within your lifetime effecting the investment outcome.

[jtollison78]

No oil royalty trusts?

[Dr. Doak]

1. What does this have to do with HBD?

2. How likely do you consider it that Israel will attack Iran?

3. Why don't more people realise this?

[S_McCoy]

I haven't looked at oil in a year but my first thought would be: "War with Iran? They've been talking about that for 10 years now" my second thought would be, "If that war doesn't happen quick, the bigger problems are deflationary pressures and general slowdown in economic activity"

I think, if war with Iran happens, well Russia and China won't like it, but it could either go clean and neat and have minimal effect on oil price or go ugly and have tremendous effect. We seem to be in the middle ground right now, low grade, computer viruses, assasinations.

I don't like oil but given the BTFD market, I don't really like much of anything, Dow stocks just because but that's about it.

Long term though, GPC, there's a few stocks to play for the much needed upgrade in the electrical grid.

Regardless, it's always a mistake to trade for the expected unexpecteds.

[dearieme]

Don't the chances an Iranattack depend on how O is doing in the opinion polls?

[Asdf]

Without commenting on the investments themselves, I applaud sigma for posting them before the fact. Takes balls.

[RandyB]

If you're only interested in hedging your personal energy expenses against future price increases, you can buy the ETF for petroleum, USO, that tracks the wholesale price of crude.

[Mercy Vetsel]

HS: So are you investing based on the short-term threat of war with Israel or the long-term macro trend?

Either way, I say bad idea. ST markets are very efficient otherwise it would be easy to make money as a trader. LT, as Devin points out, oil companies own a tiny fraction of the world's reserves and you pay a lot of money for it.

I think a better way to play your LT belief in increasing oil prices is to buy oil alternatives, namely natural gas and coal. 2008 showed us that higher oil prices bring to bear tremendous market pressures to use natural gas, to build coal-to-liquids plants and to reduce demand.

Unlike oil, you actually can buy natural gas reserves and coal reserves on the stock exchange and they are dirt cheap.

$10/gallon gasoline in the U.S. would INSTANTLY destroy all of the political capital of those standing in the way of using these resources for transportation fuel.

If oil prices don't go berserk, then natural gas will continue to be helped by the shift away from coal and the huge cost advantage over oil.

So ST I'd say avoid competing with the pro traders who have way more information than you and LT, where a longer time horizon can benefit you, I'd buy natural gas.

-Mercy

[Dan Kurt]

re: "The majority of my life savings are invested in individual oil and gas stocks." HS

I fear you are asking to become BANKRUPT, especially if you use leverage.

Expect LESS than 20 dollar oil in the next four years.

In case you have not noted, the entire world is entering a double dip recession. War over Iran will not happen as Israel has no realistic hope to win it alone and the USA under Obama is run by Valerie Jarrett of the Iranian connection, his éminence grise, who will NEVER allow such an attack.

BTY, there is little or no chance of an Obama loss unless the stock market crashes by the end of September. The crash will come later and DOOM the Obama second term. It probably will destroy the Democrat party for half a century as well.

More likely than a war over Iran is a civil war in the USA or a coup.

Dan Kurt

[alonzo portfolio]

Agree with Dan Kurt. Each of us is more likely to die at the hands of a black gang than to ever pay $8 for gas.

[Mark Caplan]

The Intrade website has a futures contract for an overt airstrike on Iran before the end of this year. The current odds are only 28%. The physical oil ETF (symbol: OIL) is trading toward the lower end of its 52-week range. Half Sigma is way out in front of the pack on this one.

[Logan]

I think you set up a strawman of the efficient markets advocates. I don't know of anyone who says that just because prices tend towards optimum levels, that therefore all prices must be treated as already being at said level. If we believed that, nobody would ever act on any information, ever, because the market is, in theory, always at the end state.

[Conquistador]

How is an Israeli attack on Iran even possible? Their planes don't have enough fuel to make the journey there and back again. A lot depends on permission to use Arab airspace plus American support. Too many variables on the table and information leaks will blow the element of surprise. This isn't like Iraq because Iran has their bases hidden and spread out. I could be wrong but it seems like more talk. Israel has been hyping an attack on Iran for how many years now? Get it over with already gawd damn.

[2ndtry]

Dan Kurt is a wacko. Go back to Zerohedge.

[Peter]

"How is an Israeli attack on Iran even possible? Their planes don't have enough fuel to make the journey there and back again. A lot depends on permission to use Arab airspace plus American support."

Israeli's attack aircraft have midair refueling capability. The main constraint on long-distance activities is Israel's small fleet of aerial tankers, around eight to twelve according to various estimates. Still, there should be ample capacity for a significant strike on Iran's nuclear facilities.

If Israel decides to attack Iran it's certainly not going to bother asking other countries if it may use their airspace. None of the countries it would overfly would dare do anything.

[Eazy-E]

Geeze, the yield is terrible with XOP (under 1% - http://www.google.com/finance?q=XOP).

[Josh]

KOG is a great oil stock to invest in. Especially for active traders, but also for long term investors.

[JHP]

I agree with those concerned with negro criminals. They are a real danger. An investment in firearms, training and ammunition is a good idea for those that have not done so. Not expensive either.

[DaveinHackensack]

With volatility as low as it is now, I'd consider hedging, while it's cheap to do so. For example, the cost of hedging against a greater-than-20% drop in the Dow between now and next March is only about 1.5% of your position: https://mobile.twitter.com/PortfolioArmor/status/235952464917049344

If the market goes up over that time frame, you'd be out 1.5% (or less, if you sell your puts before time decay accelerates and you recoup some of their cost). But if the crap hits the fan in a big way, your puts will sky rocket in value.