How to invest in impending oil crash?

Investment Analysis Clubs Saul’s Investing Discussions
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Friends,

Let’s assume you’ve researched the living bananas out of the coming electric vehicle revolution & transportation disruption. And sure, you have some TSLA stock. But you really think the best way to profit from this coming disruption is to bet against the biggest losers, who will be the oil companies.

What are some possible routes to take?

Timeframe: let’s say the bottom of the S disruption curve starts happening mid 2018, 2019, when the Tesla model 3 is past the initial production woes and the proof of concept becomes visible to more and more people on the streets.

This video is useful, but Monkey thinks the disruption will happen way sooner, so is thinking about possible plays now.

https://www.youtube.com/watch?v=jwHN6QQWv2g

Thoughts?

Monkey (long TSLA, and short ______?)

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A few important questions to keep in mind in this consideration are how much is possible future decreased demand for crude oil already priced into the current price? Also, don’t forget that there are many other uses for crude oil besides only automobiles (shipping and planes being 2 big uses, along with power generation in some locations of the world…hardly any in the U.S.).

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One way to short oil is with SCO - a double short ETF. It’s the ProShares UltraShort Bloomberg Crude Oil that returns twice the drop in the Bloomberg WTI Crude Oil Subindex.

You buy it like a stock and don’t need to know anything about shorting stocks and you don’t need any margin.

Craig

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I agree in the next several years we should start seeing an impact on Oil demand. There has been several good articles, videos, etc… on this new economy that is coming our way. Like a lot of companies in the past new technology will leave many in the dust.

I also already have Tesla for the long term, but would like additional ideas on what to invest in over the next couple of years.

I could always use options, but would rather invest in some companies-as I think the timing is still very fluid. Anyone else looking at this?

thanks

David

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I question that there will be a “crash”. Decline? Sure. But crash implies something steeper and more sudden. If I am wrong, and the price of oil justifies the term crash, I would expect an overshoot, where prices fall below what makes sense given all the other ways we use petroleum. An overshoot that makes bargains that can be exploited for a year, or a few.

But what I intend to do is stay away, far away. I sold all my related positions and I am not smart enough to make the right moves in such uncertainty.

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Here’s my strategy. I simply do my best to avoid investing in anything that even smells of fossil fuel. And similarly, I avoid investing in wind, solar and the like because I believe the oil/gas industry will take a very long time to unravel. I may well be dead before it happens in any significant way.

I look for unrelated investments. There’s plenty of them out there. Investing is already somewhat of a gamble, why stick your neck out so far on this chopping block?

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…is to bet against the biggest losers, who will be the oil companies.

If 100% of cars sold starting tomorrow (impossible) were EVs it would take a long time for oil companies to disappear…cars last for ~20 years given that the average car on the road is 11 years old.

First, the big oil companies all drill for natural gas as well. NG usage is increasing and is important as a backup for the variable output from wind.

Second, oil usage for transportation is about 65% of all oil and this includes jet fuel and shipping. So maybe 50% can be electrified.

So, perhaps 25% of big oil’s market goes to zero over the next 20-40 years, with 20 years being impossibly fast.

Mike

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Let’s assume you have researched the living bananas out of the coming electric vehicle revolution & transportation disruption. And sure, you have some TSLA stock. But you really think the best way to profit from this coming disruption is to bet against the biggest losers, who will be the oil companies.

What are some possible routes to take?

Number one rule: The market doesn’t care what you think.

Number two rule: Never ever ever ever use Macro Economic analysis to make equities investment decisions.

Number three rule: Invest with the trend.

Since about 500 years ago, the trend for the vast majority of humans has been increased wealth. (Roughly 500 years ago the native American Indian social structure in the Americas was completly destroyed, I believe that this was the last continent wide calamity in history.)

If one follows these rules, rather than look for shorts, one will look for companies that are growing their business at a rapid rate. Preferably ones that are doing it with low debt and have recurring revenue.

Finally, if you insist on pursuing shorts, then look for these things.

Heavy debt.

Unknown companies.

No dividends.

Conn’s Appliance (CONN) is a regional retailer marketing to the working class in the oil dependant region of the Gulf Coast.

It has debt, no profits no dividends.

The other thing to consider are bonds from oil dependant municipalities that are dependant on oil revenue.

Look for poorly run places that have been loaned money on thier good fortune not on thier assets.

Personally, I have made those kinds of investments and made a small fortune doing it. Unfortunaly I started with a large one.

Cheers
Qazulight

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Hi Monkey

I think this is a very interesting question. I don’t have answers far less a concerted strategy on this but I think it may be one of the most fundamental transitions in our generation if not across multi generations so it’s worth kicking around even if my contribution starts with a stream of consciousness.

I actually was thinking about this when I took a look at my slow moving high yield investing portfolio in the UK. Whilst yield plays and the UK economic scene moves at a pretty glacial pace, I did sit up and think about the holdings I had parked in previously invincible stocks such as BP and Shell (plus formerly BG) as well as BHP Billiton.

Ok as for my stream of consciousness:-

I think the electric vehicle revolution is reaching escape velocity now thanks to Elon et al.

I think that the impending Transport As A Service (or Mobility AAS) with autonomous driving vehicles is going to be a massive deflationary factor for the car industry.

Material science will continue to march on and there will be specialised oil based sectors (lie plastics) that might continue to do well.

Some of the old guard may re-invent themselves - such as hopping from oil to natural gas or from specialty chemicals to pharmaceuticals.

Certain power and fuel segments might well continue to rely on oil or natural gas (aviation oil - that is underpinned by a global aviation expansion trend that is coming up to 100 years, natural gas turbine electricity generation - which should actually increase as the world goes electric).

I think I remember Buffet talking about when a disruption happens (ICE taking over from horses or refrigerators taking over from the ice block industry), it is a surer bet shorting the decline than being long the emerging category as picking winners is harder than shorting a declining trend.

Personally I have found investing in tail wind industries much safer than trying to invest in an industry in decline - though I have never shorted anything before which might change the tables here.

In the future I might restrict my hydrocarbon investments to natural gas in the US, aviation oil and aviation leasing in Asia and perhaps some cigar butt yield plays in UK or some absolute worldwide lowest cost producers in say Russia - like Gazprom but I’m going to limit my Oil and Gas exposure from now on and I will look to taper it going forwards.

Ant

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Hi Monkey,
You might try a different positive aspect instead of the negative side. Investing in Lithium producing companies since almost all battery technologies today and even the ones coming down the pike revolve around Li. This means a fairly certain growth path for Li needs and if you check the lithium stocks you will see a pretty stock price rise over the last year or so…

Randy

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Randy and Monkey if you think Lithium crystals is the final frontier then fwiw - the ETF I’ve been in has done pretty well called LIT - (Global X Lithium & Battery Tech ETF) which is up 50% in the couple of years I have held. Supposedly those in the know distinguish between different mining operation but I haven’t had much luck investing in the mining space so prefer to not get involved stock picking between Lithium Miners.
Ant

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I have made those kinds of investments and made a small fortune doing it. Unfortunaly I started with a large one.

I love it Qazu! Gave me a good laugh when I needed one tonight.

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Hi - auto sector appears to move in the direction of electric vehicle. We do need fossil fuels to produce electricity.

But that aside, the electric vehicle market is limited by Cobalt (as well as Lithium) that go into batteries. I would look for companies in mining for these minerals.

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