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Adding New Major Trend – The Long Term Oil Story

9 December 2009 2 Comments

If you haven’t checked out the Major Trend page before, I recommend you check it out. It is my list of major trends that I’m following. These are trends that are multi-year, maybe even multi-decade stories that I believe are worth being a part of. As with any long term trend, there are ups and downs along the way. Short term movements don’t change the validity of the trend and from what I can tell, only major fundamental changes will make the train jump the track. Of course, we are monitoring for such changes.

Today, I’m adding oil as another major trend that I’m looking to participate in. I believe there are a number of positive factors that make oil a nice long term story.

The Idea of Peak Oil

I’ve read a good bit about peak oil and the reasoning behind the idea that we are potentially running out of oil. While many experts do make a sound argument for such a case, I’m not willing to join the peak oil camp just yet. What I do believe is possible is the idea of peak cheap oil meaning that we are running out of the cheap oil.

How can some oil be cheap and some not be cheap? That’s easy. Because some oil is easily accessible, just under the surface, and therefore very inexpensive to extract. I think that we could possibly be running out of the inexpensive-to-extract oil. Sure, there is other oil to be extracted, but it’s at a higher cost.

Global Consumption

While consumption may have peaked in the United States and other developed countries, there are still billions of people in Asia that are hardly consuming any oil. This is of course, mostly impacted by transportation. The growing middle classes in India, China and other countries will begin to buy cars and increase their consumption.

While the supply of cheap oil might be dwindling and global demand for oil holding steady and maybe increasing (especially as the global economy rebounds), there is a strong case for more expensive oil.

Inflation Hedge

As any commodity is a potential inflation hedge, so is oil. As U.S. dollars become worth less, the price of oil (priced in dollars) will go higher. Investing in real things such as oil, gold, silver, and other commodities is a way to preserve value assuming that fundamentals don’t weaken for that specific commodity.

The Nut Job Factor

Lastly, we need to mention the Middle East, the region where much of the world’s oil comes from.  Specifically, we need to mention the nut jobs that are in charge of certain nations; namely, Ahmadinejad of Iran.  Any instability or conflict in this region or country will have a negative effect on oil supply and cause prices to go upward.  It’s hard to imagine that there won’t be some sort of conflict at some point.  Oh yeah, Venezuela and Russia are also major oil producers (great).

Ways To Invest

The energy sector provides some interesting investing options. While it is possible to invest more directly to the price of oil through ETFs such as USO, I prefer energy companies and trusts in order to take advantage of nice dividend yields.

Here are a couple of my current positions:

EV Energy Partners LP (EVEP) – EV Energy Partners engages in the acquisition, production and development of oil and gas properties. This company is structured as an MLP which is more of a partnership versus a corporation. Basically, the structure allows them to keep more money (from taxes) and distribute the money through higher dividend payments. The position is currently yielding just over 11%.

Harvest Energy Trust (HTE) – Harvest is similar to EV Energy Partners in that it is similar structured. This is a Canadian Energy Trust and is also focused on high payouts to investors. Currently the position is yielding about 6%. I locked in a much higher yield, however, since I got in at $5.65/share and it is currently at $9.43 a share.  Update: I’ve sold my HTE shares due to the suspension in its dividend.

I also currently have a position in Chesapeake Energy (CHK) which is more of a natural gas play than oil, but it is worth mentioning.

If you’re not ready to make a move on an energy trust or MLP type position, consider the more diversified energy ETF options which can be seen here.

Moving forward, the price of oil will likely fluctuate which will have a direct impact on share prices of the above positions as well as any energy related stock.  The key is to maximize these opportunities especially when we are focusing on yield as I am in EVEP & HTE.  As it is impossible to predict the price of oil over the near term, it is key to build these positions over time, and maximize any significant pull backs.  The major trend that we are trying to gain exposure to is higher oil prices over time.  This might be 5 years or 25 years, but we think it will definitely happen.  I’m happy to earn yields in the 10% range while I wait this trend out.



  • 20smoney (author) said:

    Actually I used to have a big position in CHK but sold most of it. I have a small position remaining just to keep some exposure to natural gas. I do have a small position in Mirant Corp (MIR) that I'm hoping to do a post about in the near future (utility).

  • Pandora Charm said:

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