Analysts and market experts are still all over the place when it comes to oil market projections. But with a growing consensus belief that the bottom is in, the Energy Select Sector SPDR (ETF) (XLE), the United States 12 Month Oil Fund, LP (USL) and the VanEck Vectors Oil Services ETF (OIH) offer three unique opportunities for long-term oil investors to buy low.
Energy Select Sector SPDR (XLE)
Not all of us are oil industry experts, but we still realize the potential long-term benefits of buying low and selling high.
The most diversified (i.e. safest) way to invest in a long-term oil market recovery is by buying the XLE ETF. The XLE includes shares of 38 different types of oil and gas stocks ranging from integrated giants like Exxon Mobil (XOM) to oil services stocks like Schlumberger (SLB) to exploration and production stocks like Pioneer Natural Resources (PXD) to oil refiners like Phillips 66 (PSX).
This diversification is great in terms of limiting risk, but too much diversification can also hinder gains. Sure the oil market is depressed, but not all oil stocks are cheap. Refiners have boomed during the decline, benefiting from cheap input prices and large crack spreads. In fact PSX’s stock is up 119% in the past five years.
United States 12-Month Oil Fund (USL)
Like its popular ETF cousin, the United States Oil Fund (USO), the USL is an ETF that only invests in crude oil futures contracts.
Unfortunately, because these futures contracts have to be rolled over on a monthly basis and because they have a time value associated with them that is constantly decaying, both of these ETFs suffer from contango. Without going into too much detail, the ETFs typically “leak” a little bit of value every time the contracts are rolled over. In the short-term, it makes very little difference. However, for long-term investors, these ETFs can significantly lag the actual price of crude oil. Just take a look at the chart below of how USO and USL have performed versus WTI crude prices so far this year.
Because of its structure, USL typically suffer less from contango than USO, but both can severely lag their benchmark over time.
VanEck Vectors Oil Services ETF (OIH)
The OIH ETF is another option for long-term investors. The OIH holds 25 different oil services stocks. Some oil services stocks, especially offshore drillers, are suffering from the same balance sheet woes that E&P stocks are navigating, but the larger names in the industry have navigated the cycle relatively well. SLB and Halliburton (HAL) make up nearly half of the OIH’s holdings, and neither are in any imminent financial danger.
Oil services stocks indirectly benefit from higher crude prices because oilfield activity increases right along with prices. However, if prices and production remain steady, oil wells still decrease in productivity over time. So even to maintain a steady output, producers must continually drill.
Finally, as more and more of the “easy oil” gets drained, oil producers will be forced to rely on more advanced drilling and extraction techniques to access more. That is extremely good news for OIH investors in the long-term.
Disclosure: As of this writing, Wayne Duggan was long SLB and HAL.
More From InvestorPlace:
