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Comment by rcarrigan87 | Hacker News Reader

I bought some shares in an oil ETF a fews weeks ago my investment rationale was:

1. If the price stays low I win because my gas will be cheaper (essentially hedging my gas costs). If the price rises my cost at the pump will increase but will be offset some by gains on the ETF.

2. Geopolitical flares up typically drive oil prices higher. Low oil prices destabilize a lot of countries and increase the probability of these issues. It's almost like low oil prices will inevitably lead to high oil prices.

Of course, this is all speculative (mostly for fun for me although it is real money). I would never invest money I couldn't lose based on this loose reasoning. But now I get to call myself an "oil man."

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Public service message from someone who went down this road before: it's worth studying up on the futures market. In particular, there's a nasty little thing called "contango" that effectively makes your investment worth less and less every month that you hold it and oil prices don't go up. Think of it as a rental fee for the tanks where they keep the oil held by investors.

The upshot is that you can lose money on oil futures even if prices don't go any lower, and you may lose money even if prices go up, if it takes a long time for that to happen.

tl;dr -- there's no clear way to make an investment that cleanly tracks the price of oil, like there is for the Dow or the S&P 500 or the Japanese Yen.

With all due respect, you're jumbling a bunch of parameters w.r.t. contango, and its implications. Contango structure can exceed cost of carry even if crude oil prices stay flat. There are lots of dynamics, which you allude to.

Fully agree -- it's more complicated than that, more than can be explained in a HN comment. I think you agree with my main point, which is that buying an oil ETF (or usually actually an ETN) doesn't mean your money will track the spot price of crude.

Is investing in a company like exxon a good proxy for oil price?

No, it's not.

An integrated oil company like Exxon has activities that lose money when the price of oil goes down (drilling, exploitation) and others that make more (refining, retail). The price of oil dropped by about half during the past few months; Exxon barely budged.

A better proxy for oil price could be drillers (Diamond Offshore Drilling for example) but they're very far from perfect either. In general, it is very hard to track an asset which price is expected to be mean-reverting like the price of oil.

Not really. A company is always way more complex.

1. If the price stays low you've lost because that money could have been better invested elsewhere. You would have been better off putting that money in your fuel tank, which you'll have to do anyway.

> It's almost like low oil prices will inevitably lead to high oil prices.

Well, historically yes. It's almost like markets exhibit some cyclical behaviour. Good luck picking where to get on and off.

You don't need to rationalise a gamble, just call it was it is: a gamble not an investment. And that's okay. As a perfectly spherical rational actor with zero information-friction I've placed a few bets too.

If the price stays low, he still has the insurance feature of his position (limited downside risk if the price goes up) -- which he wouldn't have otherwise.

The middle east is where the vast majority of geopolitical conflict happens these days and the middle eastern powerhouses (Saudis, Iran, etc) are the ones driving the price down. I doubt they'd do this if it created a security risk internally.

So I'm curious what ripple effect you expect might happen as a result of this decline? South American oil countries? Africa?

More like the Saudis are driving the price down partly in order to inflict damage on the Iranians, with whom they are engaged in something close to a cold war, but mostly to choke out the high cost producers in the US and make future investments in that sector look very risky.

There is definitely a strong destabilizing effect on Russia, Iran, and Venezuela at the very least.

Russia.

Pardon what may sound as a dumb question..

If I understand this correctly, as first quarter and 2nd quarter reports come out, oil-related firms will drop in share value assuming oil prices now are stagnant?

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