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Is there an intelligent way to play commodities?


u0422811
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In the spirit of gravitating towards hate as a potentially buying ground I keep find myself thinking is there a good way to play commodities.  Clearly the most optimal would be a thorough investigation of bottoms-up work on specific companies, but if I wanted to make a broader bet via an ETF or say a mutual fund are there any good options?

 

Most ETFs are structurally flawed due to roll-yield with contango and I am not aware of any mutual funds that have anywhere close to a passable record. 

 

I would love to be able to find a good value oriented mutual fund manager with a nice long-term track record who focuses on commodities but I am not sure that exists. 

 

Any thoughts from those who are wiser than I am?

 

Thanks.

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you can buy 1000 barrels of oil for december 2023 (as far as it goes out) delivery on IB. $60 / $63 bid-offer with liquidity becoming MUCH MUCH better as you move in. IB will allow you to post 12% margin, so it's not like this requires a lot of capital. Of course if you lever it, that may prove quite disastrous.

 

8 yrs seems like a long enough time for marginal guys to bankrupt and oil to "correct". But maybe $60 is the "correct" price. I don't know. Just saying that I had not considered this option until recently. When I was talking to someone about the best way to hedge my BPT short (BPT is a derivative of WTI and prices in much higher than market oil prices). They said "just buy oil".

 

There is also a 500 barrel mini contract.

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This goes towards the question I have been pondering on Twitter the last couple of weeks. It seems like some value investors often implicitly do things like commodities trading, forex trading, macro forecasting and technical analysis when they buy stocks. They just do it badly, by using rules of thumb instead of rigorous analysis. But I am still exploring what rigorous analysis would look like.

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Yes, as TwoCities said, check out Altius. It is a diversified mining royalty company operating in Canada that is operated by some pretty smart guys with a proven track record. There is an extensive thread on Altius on this board.

Wow, that thread was started January 8, 2011. Almost 5 years in, ALS is down 13% in CAD terms, while CAD itself is down another 25% on top of that.

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There is such a thing as rigorous analysis in commodities. Since 2011 I've followed an Israeli value investor and blogger called ido meroz, who now lives in China. He analyzed housing supply and demand in China and concluded there is massive housing oversupply.

 

China is the largest consumer of steel, and miners at the time were projecting continued growth in demand and expanding mining. He saw a problem for steel both from supply and demand  and bet big against Vale (30$ at the time, 5$ now) and Australian dollar. Steel prices have dropped from 160$ then to around 50$ now.

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you can buy 1000 barrels of oil for december 2023 (as far as it goes out) delivery on IB. $60 / $63 bid-offer with liquidity becoming MUCH MUCH better as you move in. IB will allow you to post 12% margin, so it's not like this requires a lot of capital. Of course if you lever it, that may prove quite disastrous.

 

8 yrs seems like a long enough time for marginal guys to bankrupt and oil to "correct". But maybe $60 is the "correct" price. I don't know. Just saying that I had not considered this option until recently. When I was talking to someone about the best way to hedge my BPT short (BPT is a derivative of WTI and prices in much higher than market oil prices). They said "just buy oil".

 

There is also a 500 barrel mini contract.

Pupil he goes into how often these forward prices are correct a few minutes in:

http://www.bnn.ca/Video/player.aspx?vid=684653

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you can buy 1000 barrels of oil for december 2023 (as far as it goes out) delivery on IB. $60 / $63 bid-offer with liquidity becoming MUCH MUCH better as you move in. IB will allow you to post 12% margin, so it's not like this requires a lot of capital. Of course if you lever it, that may prove quite disastrous.

 

8 yrs seems like a long enough time for marginal guys to bankrupt and oil to "correct". But maybe $60 is the "correct" price. I don't know. Just saying that I had not considered this option until recently. When I was talking to someone about the best way to hedge my BPT short (BPT is a derivative of WTI and prices in much higher than market oil prices). They said "just buy oil".

 

There is also a 500 barrel mini contract.

Pupil he goes into how often these forward prices are correct a few minutes in:

http://www.bnn.ca/Video/player.aspx?vid=684653

The video doesn't work for me for some reason, but far out futures were $85-$90 a year ago, so hey weren't "correct" then judging by today's prices. I'm not buying crude futures, I'm just throwing it out there as an option.

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thepupil,

 

Basically the video has Eric Nutall from Sprott saying that futures R^2 to actual is ~1% [EDIT: For clarity I mean to "actual, future prices"...].

 

I'm not really sure what the takeaway is from that, since if you are an oil investor today, you should absolutely be looking at Oil companies, and futures and saying "do these diverge".

 

I think your Prudhoe Bay short is exactly this case... clearly, "at strip", it's worth way less.

 

How do hedge this?  Buy the strip with proceeds from BPT and chill on the beach.  Maybe strip is wrong, but who cares.

 

I think buying Oil Cos requires to at least think about the strip.  I think most super majors trade effectively above strip today, so if you are "bullish" on oil, it's probably best to buy the strip rather than XOM (or whatever) if that is available to you.  This analysis is simplistic because many things will effect XOM or other oil co's cash flows (refining, services cost, any M&A they do during crisis, etc), but if you think oil is absolutely going to rise to $80 in 2 years, buying futures is an easy way to isolate your supposed edge.

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