Investment Opportunity Related to Falling Oil Prices

If you’ve been paying attention at all lately, you know that gasoline prices are down substantially this year. While overall the prices of gasoline and oil are only partially related, in this case, they are very closely related. Prices for West Texas Intermediate Crude (WTI) have fallen from $107 six months ago to below $63 today.

The question is, how to make money on this. Well, in most cases you would be pretty late. Airlines, which burn amazing amounts of fuel are up strongly already. Southwest Airlines, one of my favorite airlines both to fly and to invest in, is up 120% so far this year. Consumer stocks, which benefit from their customers having more money in their pockets because they are spending less on gasoline are also up already.

On the other hand, oil company stocks, which have fallen sharply in many cases (Nabors, Diamond Offshore, Transocean and Seadrill are down 40% – 70% in the last six months) may not yet be low enough to warrant buying.

One the most tempting and dangerous strategies on Wall St. is to buy stocks that have fallen dramatically and show big discounts to recent prices but are still declining. But, very often they fall much farther than what you assume is a fair price. The old Wall St. adage, “never try to catch a falling knife” is good advice.

Be patient and let the stocks show a bottom before you buy. That may be a climactic selloff to levels where the company becomes cheap on fundamental measures of value (think 2008-09) or it may be a gradual decline in selling that is followed by flat or slightly rising prices. Generally, the longer the stock or industry stays down with flat or only slightly rising prices, the better.

One area of the energy market that is worth looking at is the energy pipelines. Don’t buy them directly, their taxes are complicated and you’ll be waiting on K-1s come tax time. Instead, buy them through a mutual fund or exchange-traded note.

I like the Oppenheimer Steelpath MLP Select 40. Despite a recent decline, it is still up 8.5% this year, most of which has come from its 5.6% dividend. Because it is a mutual fund, the IRS allows you to get a regular 1099 as on your other investments. The fund owns 40 different master limited partnerships, so it is diversified. The price is down lately because investors tend to sell all stocks in a declining industry, even when they don’t deserve it.

This investment doesn’t deserve it. Energy pipelines care little about the price of oil. They are like toll roads, just charging for the use of the pipeline. So, when the pipeline’s price is down, you should consider buying. Don’t be hasty though, I expect this fund to likely drop another 5% – 10% because I think oil will keep dropping.

Oil companies, especially those with good finances, will be a great buy sometime in the near future. Be patient in the meantime and study which will be the best buys when things bottom.