Why this is the season to invest in oil, crisis or not
Even without the dramatic events in the Middle East, this is the best season to invest in oil, says a Canadian analyst who likes three ETFs.
The price of oil can be unpredictable at the best of times.
At the moment, it’s not easy to distinguish between the best and worst of times in the Middle East. Optimism and brutality follow hard on the heels of one another.
But it is certainly lighting a fire under the price of crude oil.
With the price rocketing up above $97 a barrel, what should investors be doing? Is it time to invest, or to wait for the next thunderbolt of news?
In fact, says one Canadian analyst, this is the best time of the year to be investing in oil — whether there is a geopolitical crisis or not.
Mr. Keith Richards has been advising investors to take a careful look at the energy sector for some time now.
A senior portfolio manager, he discusses his investing strategies regularly for the readers of Investor's Digest of Canada.
We are in the prime season for buying into oil, he says, and the season will last for several months. But there will be a time to retreat.
The best way to buy into this volatile sector, he believes, is with a selection of exchange-traded funds, or ETFs.
Disrupting the markets
A month ago, Mr. Richards was calling for a correction in the price of crude oil (see Daily Buy-Sell Adviser, January 26). He got it.
Energy stocks on the S&P/TSX Composite Index were richly valued compared to the broader market, he noted. Sure enough, oil slipped to the mid-US$80-a-barrel level.
Then, as he completed this article, the crisis in Egypt was building to a crescendo. Amid worries that unrest would spread, the price of oil roared back to around $92 a barrel.
Since the article went to press, violent clashes in Libya have seized the headlines.
Egypt is not an oil exporter. Unless the Suez Canal was shut down, the country’s troubles would not seriously disrupt the world’s energy markets. Libya is another matter. It plays a larger role among the oil-exporting countries.
Yet even if none of this had happened, we would still be entering the height of the oil investment season, this analyst insists.
A profitable trade
“While a call on oil may be a bit of a wild card right now,” writes Mr. Richards, “seasonal studies indicate that buying into the energy sector in late February and then selling in early May can be a profitable trade.”
According to Mr. Brooke Thackray, an expert on seasonal investing, energy stocks tend to outperform the broader market by “a whopping five per cent” from February to May, this analyst reports.
The reason for this has nothing to do with politics, he adds. Refineries switch from heating oil to gasoline at this time of the year as they anticipate the summer driving season.
During the switch, inventories for both heating oil and gasoline decline. Naturally, prices rise, creating an opportunity for investors.
“I must hasten to point out that seasonal factors on any sector of the market are only one tool in the toolbox to help us make investment timing decisions,” cautions Mr. Richards.
But his technical charts appear to confirm the positive seasonal message, he adds, providing evidence “that the trade may indeed be profitable this year.”
Three ETFs
Of course, the events in the Middle East aren’t as susceptible to analysis as seasonal trends. If there were a general resolution to the problems of the area (which does not seem imminent), the price of oil would surely settle back down.
“All the while,” says Mr. Richards, “its overall pattern remains in an uptrend. What more could you ask for?”
The analyst pauses to consider another corner of the portfolio. Earlier in the winter, he had recommended taking a strong position in technology stocks. And they did outpace the broader markets during the winter.
Now seems to be a good time to switch, he says. By shifting some of the proceeds out of tech stocks and into energy stocks, “we can take advantage of ‘selling high and buying low.’ That’s really what it’s supposed to be about, isn’t it.”
The money would be well placed in two ETFs, he states. He owns both of these.
One is iShares S&P/TSX Capped Energy Index Fund (TSX-XEG). A month ago, when he recommended it to readers of Investor's Digest of Canada, it traded at $20.25. Today it is at $22.52.
The other is Horizons BetaPro Winter-Term Crude Oil ETF (TSX-HUC). $11.50 last month, it now trades at $12.13.
Aggressive investors may wish to consider buying small cap oil stocks through BMO Junior Oil Index ETF (TSX-ZJO), he continues. It is trading at $22.67.
Mr. Richards is certainly not putting all of his emphasis on oil. He will play the broader markets with a diversified portfolio of securities, he says. The market party is still on, and there is still time for a bit more fun.
But stay sober and disciplined, he cautions. When the time comes, he tells his readers, he’ll do his best to suggest “when it may be wise to leave the party, get into the cab and head to the safety of home.”
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