How To Profit From The Oil Boom

So the price of oil is high, who doesn’t know that?  With the recent downturn in oil prices many wonder if we have already seen the highs of our oil boom and well it’s only down from here.  I personally have a different opinion than many on this issue and believe that we are still in a long-term bull market for oil and natural gas prices.

Now let’s assume for the moment that this opinion was indeed fact.  One should ask how to profit most from this outlook.

The first way to profit from this long term view of energy prices is to buy the actual commodities themselves.  This is Jim Rogers strategy, author of the book Hot Commodities as well as the partner at George Soros’ fund the Quantum Fund many years ago.  I have no problem with this strategy and to the average individual I believe this is one’s best bet.  My reason is that an individual may pick the wrong energy stock and make very little money and perhaps even  lose it all in a bust.  A terribly run energy company will surely do horrendous in an energy bust and may not do so much in a boom.  This is a lot of risk without much reward.  Therefore, it is probably safer to stick with the actual commodity itself.
Now that being said, most commodity traders leverage up their positions for handsome profits (or steep losses).  Remember this is not a trade but an investment (or perhaps a VERY VERY long trade).  That being the case, you will surely have more volatility than the average blue chip stock.  Leveraging up your positions could lead you to losses of over 100% if you purchase at a short term peak.  You could get margin calls in a downturn and lose more than 100% of your capital while the un-leveraged commodity investor would lose a lot but make it back and more during the bull market.

The second scenario is to in fact invest in individual companies.  But how do you know which ones to buy?  First of all don’t touch any companies that just own leases on oil wells or have NO proven reserves as many of these are frauds.  Even if they are legit companies they could still go belly up if they find no natural resources which is the case a lot of the time.  Remember if an oil company has no oil it doesn’t matter what the price of oil is because any price times 0 equals a big fat 0 (minus Cost of Goods Sold = Chapter 11).

So how do you figure out which companies are going to benefit the most?

1st strategy) Buy a really well managed energy company…say Chesapeake Energy (CHK) which is a lot of my portfolio.

2nd strategy) Buy an energy services company such as BJ Services (BJS) or Enterprise Products Partners LP (EDP)