Trading Blog: Scaling Into Oil Trusts
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by Daniel R., Homemade Investors
Monday, December 8th, 2008

In my article entitled Predictions and Ideas For the Future, I
suggested that crude oil could soon give us a buying opportunity
in the low $50s. Well, we got an even better opportunity last week
when oil broke through $50 a barrel and headed straight to $40
on Friday.

Oil has a fairly strong band of support between $38 and $40, so
now is a logical time for oil to put in a long overdue rally. Plus,
technical indicators are quite oversold and OPEC (oil's notorious
price-fixing cartel) is scheduled to hold a meeting mid-December to
decide if they'll be cutting oil production. With oil in the $40s, I'm
betting that they probably will. If they cut production sharply, we
could see the price of oil rally nicely.







































For those of you who are looking to buy, it's probably time to
start thinking about your entry point. Traders should use stops to
limit their losses in case things turn south. Long-term investors
may need to use caution and may want to consider buying
gradually over time on down days rather than all at once.

I personally started buying a few oil trusts last week. In particular,
I like PGH (Pengrowth Energy Trust) and PWE (Penn West Energy
Trust). These oil trusts are designed specifically to deliver oil
profits to their shareholders, and at current prices they are
generating dividends well above 30% per year! Those looking for a
more direct way to play a swing in oil's price might consider OIL
(an ETF).

There are risks to holding Canadian-based oil trusts however.
First, they will be taxed at corporate rates beginning in 2011,
which may cut their profits significantly. Secondly, they may cut
their dividends down somewhat in response to $40 oil. Thirdly, the
current financial environment is quite unpredictable, which could
lead to further stock losses, lower oil prices, or make getting loans
difficult.

But then again there's always risk, and I'd rather risk my money
on $40 oil and 30% dividends than on bank stocks that don't pay
me anything. I don't much like the look of these companies'
charts, but I'm not buying them for a trade. I'm buying them as
long-term investments, and from where I sit they look to be some
of the better opportunities out there.  

Happy trading!

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