The Story of the Times

IVC Oil focuses on investing in the "Oil Patch" during the recent extreme pops and drops in the energy market, which brought dozens of domestic and international energy companies to the verge of bankruptcy. The four instruments available to trade are XOM, OIH, XLE, and OVX. The story of each is below.

The game begins in May 2007, which is the beginning of a very turbulent time in the Oil Patch. The price of a barrel of crude oil is $70 per barrel. By July 2008 the price reaches an all time high of $145, but by the end of the year the price falls to the low $40s. The price climbs back over $80 per barrel by Spring 2010 and goes back above $100 by the following year. Prices hold steady until the beginning of August 2014, then slide relentlessly downward until January 2016, when they bottom out at around $30. The price of a barrel of crude seems to have stabilized in the $40s since the middle of 2016. Along with all the craziness in the price of oil, the stock prices for stocks in the Oil Patch have been extremely volatile!

The Story of the Stocks

XOM: ExxonMobil Corporation
ExxonMobil Corporation is currently the eighth largest company by revenue and the fifth largest publicly traded company by market capitalization (the number of shares x the per share price), according to Wikipedia. As of 2013, ExxonMobil had reserves of 25 billion barrels of oil equivalent (BOE). Major corporate activities include oil exploration, drilling, transportation, and refining. ExxonMobil is the largest refiner in the world with 37 refineries in 21 countries.

The stock price of ExxonMobil is tied to the price of oil, but the size of the company and its very deep pockets insulate it somewhat from much of the market volatility. Exxon Mobil traded in the $80s and $90s in 2007 and 2008, but fell into the $60s when the price of oil went down in the second half of 2008. However, the stock price went to over $100 by 2015 and settled back into $80s and $90s by 2016, despite the fact that the price of oil never fully recovered. A return to 2008 prices may seem inconsequential, but the stock has been paying a 2%+ dividend per year for the entire time.

OIH: VanEck Vector Oil Servers ETF
OIH is an Exchange Traded Fund (ETF), a basket of stocks that trades the same way as a stock. OIH, which was referred to as the Oil HOLDR until the 2011 transition to the VanEck Vector family of funds, tracks the performance of the top 25 oil services companies. 75% of the stocks in OIH are in oil services and include pipelines, tankers, and refineries. The other 25% are drillers. Top holdings are Schlumberger, Baker Hughes, and Halliburton. The oil services sector was severely affected by the swings in the price of oil.

The extraction of many oil reserves which would be profitable at $60-$80 per barrel are no longer considered profitable in the $40s. Drops in the valuation of reserves brought about steep declines in the stock prices of oil services and drilling companies, and they have never fully recovered. In May 2008, OIH was trading at over $70 per share. By the end of 2008, the price had fallen to $25. Although OIH sold in the $60s in early 2011 and again in early 2014, the price fell into the high $20s in 2015 and 2016. A 2% per year dividend doesn’t help much when the investment itself has lost two-thirds of the original value.

XLE: The Energy Select Sector Spyder
XLE is also an ETF but focuses on a different swath of the oil industry than OIH. Over 70% of XLE is invested in large oil exploration conglomerates, which are also in the refinery and pipeline business. Top holdings are the giants of the Oil Patch, including Exxon Mobil, Chevron, Schlumberger, ConocoPhillips, Kinder Morgan, and Occidental Petroleum.

The giants have deeper pockets and more diverse business models, so they tend to be less volatile than smaller stocks, providing protection in an uncertain market. XLE traded at almost $90 per share at the beginning of 2008 but had plummeted to almost $40 by the beginning of 2009. By May 2014, the stock price hit just over $100, only to fall into the $60s for most of 2015 and 2016. This translates to a loss of one-third of the investment capital for by anyone who bought XLE in 2008, which is at least less painful than the two thirds loss delivered by OIH. XLE also pays a dividend of 2%+ per year.

OVX: The CBOE Crude Oil Volatility Index
OVX is an ETF which is designed to track the expected short term volatility of crude oil prices. According to CBOE.com, "OVX measures the market's expectation of 30 day volatility of crude pricing by applying VIX methodology to the United States Oil Fund, LP (USO) options spanning a wide range of strike prices". USO is an ETF designed to track the price of West Texas Crude Oil (WTI). VIX (which is often called the Fear Index) is calculated by averaging the weighted prices of out-of-the-money puts and calls on USO. Low volatility implies stable pricing while high volatility implies large price swings ahead.

When oil prices are dropping, OVX tends to go up. When the price of oil goes up, OVX tends to go down. In 2008, when the price of oil tumbled from $146 to the low $40s, the price of VIX climbed from $33 to over $100. The swings in OVX prices are more volatile than the changes in the prices of the underlying stocks in the Oil Patch. OVX is normally held for a short time as a bet or a hedge that oil prices will go down in the near future.

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