Crude Oil Has Taken A Nosedive: Time To Buy or Sell? (USO, BNO, XOM)

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September 27, 2011 12:27pm NYSE:BNO NYSE:USO

Jared Cummans: To call the last few months volatile would be an understatement; markets have been violently swinging back and forth, taking investors on a wild ride. While major indexes have experienced significant headwinds, other asset classes, like gold, have generally performed well.

But when it comes to crude oil, a number of investors may be frustrated with the past two months, as the fossil fuel has taken something of a nosedive [see also Dividend Special: Top Companies In Every Major Commodity Sector].

Near the end of July, a barrel of crude oil was trading for around $100 per barrel, but Friday saw prices plummet to roughly $80 per barrel. A 20% loss in just two months can be devastating for a portfolio, but it can also be a good thing. With crude sinking, things like transportation costs and the other laundry list of uses for crude have become much cheaper, and may have boosted bottom line returns for a multitude of firms. Still, a number of investors have significant energy exposure, as these companies tend to pay high dividends and present themselves as strong value plays. Now that crude is trading at some of its lowest prices in nearly a year, investors may be wondering if it is time to buy, or sell.

The Crude Facts

Crude oil often has heavy ties to the overall economy and it will typically coincide its daily movements with a benchmark like the S&P 500. That being said, calling crude undervalued may be something of a stretch, as it appears that the American economy is not exactly on the fast track to recovery, let alone the global economy. But with such a hefty drop in such a short period of time, crude has certainly created an enticing opportunity for investors to buy in and make a quick turn around [see also Major Countries Burn Up Crude Reserves: Big Oil In Trouble?].

With prices sitting at lows, consumption will undoubtedly increase, as companies and consumers alike can afford to purchase more bang for their buck. Also consider that when crude prices are low, alternative energies typically fall by the way-side, as their expenses cannot compete with cheap oil prices; this too will help increase demand for crude oil. An increase in demand/consumption could help crude make its way back up and pare losses in an already damaged portfolio. But the fact that crude prices are generally handcuffed to equities make a number of investors nervous, as no one is sure where we will be even a few months from now [see also Three Mining Companies With Robust Yields].

Below, we outline several options to make a play on crude oil for investors looking to establish either short or long positions, or those simply wishing to educate themselves on some of the viable oil plays that exist in the market:

Exxon Mobil Corporation (NYSE:XOM)

As far as equity plays are concerned, few investments can match up to what Exxon offers. The company has a massive market cap of $337 billion and an average daily volume topping 26 million. The stock also pays out a healthy dividend of 2.6%, adding a steady income stream for investors looking to hold a security over the long term. XOM’s operations are 51% from crude and NGL production while other factors like refined products and transportation combine to account for a large chunk of the remaining revenues. This makes the stock a good all-encompassing play on oil as the company has its hands in a number of different stages of the crude production process [see also Analyzing Five High Yielding Oil & Gas Pipeline Stocks].

United States Oil Fund (NYSE:USO) / United States Brent Oil Fund (NYSE:BNO)

These two ETFs offer unique exposure to the futures contracts for both Brent and WTI light sweet crude oil. The funds will allow for users to make one simple investment while it automatically rolls expiring contracts into near month futures, effectively keeping a constant exposure to the underlying futures contracts. Though these funds are known to exhibit steep contango, they can make for great plays in the short or long-term, as their expenses come in at a much lower level– and at lower risk– than it would cost an investor to implement this strategy on their own. USO invests in light sweet crude contracts and charges 45 basis points while BNO holds Brent oil futures and charges 75 basis points [see also Why Commodities Belong In Your Portfolio].

CL Light Sweet Crude Oil (WTI) Nov 11

This futures contract, traded on the NYMEX is one of the most active crude contracts currently available. As such, this will be trader’s best bet as it will offer high liquidity to a very popular contract. The contracts are quoted in U.S. dollar and cents per barrel, and each contract is representative of 1,000 barrels. For more information on trading these futures and others, please see our Commodity Trading Center.

Written By Jared Cummans From CommodityHQ

CommodityHQ offers educational content, analysis, and commentary on global commodity markets. Whether you’re looking to speculate on a short-term jump in crude or establish a long-term allocation to natural resources, CommodityHQ has the information you need.

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