And now the spill in the Gulf is changing oil drilling in Norway–the effects really are global
The ripples from the Deepwater Horizon disaster in the Gulf of Mexico have reached Norway.
Norwegian opponents to opening the fragile ecosystems around the Lofoten Island with their critical spawning grounds for cod to oil drilling are arguing that Norway needs to delay any decision until the country fully considers the lessons from uncontrolled oil release off the coast of Louisiana.
The oil industry estimates that there are 1.3 billion barrels of oil in the reserves around the islands. Production from those reserves will help offset declining production from Norway’s mature North Sea fields.
More is at stake that just those 1.3 billion barrels.
Norway resolved a longstanding ocean-border dispute with Russia in April. That plows the way for opening potential reserves in the icy Barents Sea and Arctic Ocean for exploration and development.
Norway already has some of the strictest oil drilling standards in the world—for example, its rules on blowout preventers would likely have resulted in an automatic shutdown of the Deepwater Horizon well—but the oil industry and its critics both acknowledge that oil exploration in the difficult to access and very stormy waters of the Arctic continental shelf present new and not fully understood challenges. With current technology a clean-up of a major spill in those waters is probably impossible.
The government of Prime Minister Jens Stoltenberg is divided over whether or not to open the Lofoten Islands area to development and has just begun to consider the problems raised by oil exploration in Arctic waters.
Way back in September 2009 I added Statoil (STO) to Jubak’s Picks because I thought that elections in Norway had raised the odds in favor of oil development in the Lofoten Islands and further north. I sold shares of Statoil when the entire oil sector was sent reeling by the Deepwater Horizon disaster and not because I had the foresight to see that what happened in the Gulf of Mexico would change drilling plans in Norway. But if I still held Statoil shares, I’d most certainly sell them now on this news. (For my original take on Arctic oil exploration by Statoil see my post http://jubakpicks.com/2009/09/23/buy-statoil-hydro-sto/ )
It’s just too hard to invest in oil stocks right now. The consequences of the Deepwater Horizon explosion and oil release are extremely difficult to anticipate.
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Jim,
Just a thought, but doesn’t this make oil the commodity (via ETF’s and ETN’s) a better long term play than any oil industry company? With future oil reserves made tighter by restricting drilling, and with more demand from emerging markets like China, it seems like a supply-demand squeeze.
I have same though. This will create supply and demand squeeze.
Make that 3 people.
Ed, yx et al:
What RTF do you recommend for going long on Oil the commodity?
Thanks.
Typo ^RTF = ETF
Duty,
I’ve always heard the vehicle for making a “bet” on oil price movement is the USO, which purports to track the price of West Texas intermediate light crude. Its description on MSN is:
The investment seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil.
The criticism I’ve heard is that any etf based on futures contracts can get mispriced based on expiring contracts- the so-called Contengo affect.
I’m curious to hear others’ opinions who have actually traded which vehicles they use to bet on the price movements in oil. It’s a little too complicated for my pea brain to get around so I’ve never taken the plunge.
Everyone
What are the tax implication of owning an ETF like USO? is it any different than owning any other Limited partnership like EEP for instance?
If you’re doing non-physical ETF’s (and there are no physical ETF’s for oil), go for the longest term futures contracts and the lowest expense ratio. They face less contango and you get more of the profit.
That said, I’m not ready to buy oil yet. There’s still too much strengthening dollar headwind.
marcoiks,
commodity etfs are taxed based on income slab and also other wierd rules.More info in this WSJ article
http://online.wsj.com/article/SB10001424052702304628704575186433316749798.html
CALLOFDUTYFAN:
I don’t do energy ETF, but that doesn’t mean I don’t like them. I’d look at Vanguard, ishare and SPD’s energy ETFs first, if I want to buy energy ETF. However, I only hold individual energy stocks at this moment. STO, TOT (Jim recommended recently) and couple others. I bought STO and TOT at much higher time, so I am in loss. But I may continue to hold on to it. Because as I posted at the beginning, this oil spill will create tightening in drilling that means tight supply and higher price. I think all drilling in the gulf has been shut down now……
Caution on USO – it is not really an ETF. It is a master limited partnership, and thus sends you tax information each year on a K-1 form. Trust me, these can be VERY complicated to do on your taxes (I have four I have to do every year!)
Speaking of taxes…does anybody know if you use software to do your taxes if it’s user friendly to file capital gains/losses?? This will be my first time having to do this for 2010.
Thanks a bunch!
USO is definitely not the way to play oil price appreciation — mispricing/underperformance for extended periods is common.
If your objective is to play the oil industry, XOP has no BP or RIG holdings and may be a good bet. Also, while I recognize that this is a “stock picking” site, ETFs, unlike securitioes of an individual company, provide excellent within-industry diversification and reduce those very important company-specific risks (anyone own BP?) Cramer fans – MPT calls for some 18-20 stocks in order to be “diversified”; thus, none of his callers’ portfolios would be considered diversified.
Seaturtlelady
I use turbo tax to do my own taxes, 2009 was a nightmare scenario as I owned a master limited partnership and it can get really expensive (since I had to file taxes in several states) but overall I have been content with my turbo tax experience
marcoiks…
Thanks for the tip…looking specifically at software that will be a breeze in filing capital gains tax on individual stocks, etc.
Does anyone have an opinion/experience with the oil etf DBO
STL… I use TurboTax for filing taxes and it works well. I pair it with Quicken where I track my investments. You can transfer info from Quicken to TurboTax at tax time, then all you need to do is verify the info is correct. Very easy and have been doing this for about 5 years.
UCO — 2X leverage ETF
ProShares Ultra DJ-UBS Crude Oil UCO:NYSE Arca
The Fund seeks daily investment results (before fees and expenses) that correspond to twice (200%) the daily performance, whether positive or negative, of its corresponding benchmark.
Others: USL, UGA, OIL, DBO and DIG if you want oil and gas