How to Play Oil in the Long Term

If there’s one thing that is consistent in oil and energy markets in general, it is that they are volatile. Take a look at my chart of the CRB Index, a well-known index of commodity prices.

The chart has a log scale so you can see the magnitude of the price swings through history. First, take a look all the way to the right, and see the current dropping commodity prices. As much as it feels as though the bottom has dropped out on commodity prices, the mini-blip of a decline at the end of the chart is nothing compared to the roller-coaster ups and downs investors have endured since the 1970s.

chart: CRB Index

The commodities business is a long-term business. Take a look at Exxon Mobil Corporation (NYSE:XOM), for instance. In the midst of the oil market crash, ExxonMobil is investing $25 billion in a Canadian LNG export facility. The price of natural gas is down, and the price of seaborne LNG is usually based on the price of oil, which is also way down. But, management at Exxon Mobil realizes that even though oil prices are down today, the world will still demand energy tomorrow. That’s the way commodity cycles work.

What can you do to prepare for the next commodity cycle? Invest in T. Rowe Price New Era Fund (MUTF:PRNEX), which has been a long-time favorite of mine. The fund invests in stocks of companies that own or develop natural resources and commodities.

Since its inception in January of 1969, the T. Rowe Price New Era Fund has survived all of the volatile swings in the CRB Index and delivered an annual average return of 9.82%.

The fund’s manager, Shawn Driscoll, takes the long view of investing in commodities. Driscoll predicted the fall of oil prices back in March. He told Forbes then that while it would hurt commodities investors, “it’s not the end of the world. Commodity bear markets can actually be a good backdrop for some natural resources stocks, but you have to be a stock picker.”

To prepare for the slide in commodities prices, Driscoll employed one of the same tactics my team at Young Research uses — buying low-cost producers. Owning low-cost commodity producers positions investors for maximum gains during commodity bull markets, and minimum losses during commodity bear markets.

The current top 10 of the New Era Fund holds some interesting names. First is Airgas, Inc. (NYSE:ARG), a competitor to my highly recommended Air Products & Chemicals, Inc. (NYSE:APD) and a possible takeover candidate.

Next is Anadarko Petroleum Corporation (NYSE:APC), Cimarex Energy Co (NYSE:XEC) and Concho Resources Inc (NYSE:CXO), which are oil and gas exploration and production companies. Then comes EQT Corporation (NYSE:EQT), a natural gas production and transportation company.

Exxon Mobil is the sixth largest holding, followed by NiSource Inc. (NYSE:NI), a natural gas transportation and distribution company that also generates and distributes electricity. Eighth is Pioneer Natural Resources (NYSE:PXD), a low-cost independent oil and gas exploration and production company.

Ninth is RPM International Inc. (NYSE:RPM), a world leader in specialty coatings and sealants. The tenth largest holding is Royal Dutch Shell pld (ADR) (NYSE:RDS.A), a large integrated oil and gas producer.

The long-term case for commodities is that the people of the developing world will demand a higher standard of living as economies there grow stronger. That higher standard of living will demand more resources.

To get the rest of Dick Young’s top stocks to buy this month for stability and long-term dividend growth, sign up for his newsletter, Intelligence Report.

Article printed from InvestorPlace Media,

©2022 InvestorPlace Media, LLC