Passive Strategies To Exploit An Oil Recovery

Passive Strategies To Exploit An Oil Recovery

With oil having been battered down with violence, it’s time to tilt a portfolio towards the energy sector. Article originally published at Master Investor Magazine May 2020 Issue 62.

Madness has been brought to the oil market, as investors are even willing to pay to get rid of oil. This month we have seen negative oil prices, something no one would ever think about.

From what we have observed thus far, investors may be willing to pay to get rid of oil in times of storage congestion. The negative-price pandemic, initiated by Mario Draghi a few years ago, has spread from interest rates to the futures market.

Oil is loosing its shine over time as the world is replacing it with cleaner energies. However, at a price tag of $10, oil seems extremely cheap. The covid-19 pandemic certainly dented the market and helped create a supply glut, but if there’s a point where I would consider buying oil, in particular the companies involved in its exploration, it would be this.

There are several ways of getting exposure to oil using an ETF. Following my investment thesis described above, I avoid all ETFs investing in ‘paper’ oil through the futures market and look only at the ETFs investing in the companies that produce the hard asset.

Low oil prices, in particular below $20 as is the case for WTI oil, are unlikely to remain with us for a long period of time. However, we’re not sure about how deep the recession created by Covid-19 will be and therefore any bet placed in the oil market should not target the shortterm. With this in mind, it’s better to avoid ETFs heavily relying on the futures market, as they face higher volatility and steep costs to roll positions

You may read the full article, Passive Strategies To Exploit An Oil Recovery, on the Master Investor Magazine, as usual. This month has been published as blog posts instead of its usual format.

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