now, because we have many years ahead of us to enjoy the boom. The
question is whether you—as an investor—are going to be part of that
blessed group of people. Oil stocks, whether you invest in oil exploration
or refining companies, are doing so well that market analysts discount
any possibility of a meltdown.
Wall Street has re-rated the oil sector, suggesting that this rally has a
staying power and is a good buy. Current and future supply-demand fundamentals
support this bullish view. Big oil investors need a sector large
enough for them to invest in, and they don’t get any bigger than oil.
Large institutional investors, as well as hedge funds and private equity
firms, have piled into oil.
For a start, listen to this: Goldman Sachs, the scion of Wall Street investment
banking, has teamed up with a private equity firm, Kelso & Co., to acquire
Coffeyville Resources LLC, which owns a 100,000-barrels-per-day
refinery in Kansas. This action is part of a recent trend of Wall Street banks
to buy physical energy assets, because they believe energy markets will remain
stout for a while.
Goldman Sachs also has an investment commodity index, which
means it manages a pool of money from ordinary investors by buying and
selling energy stocks as well as trading energy futures. Energy futures are
paper contracts or agreements to buy or sell physical oil and gas cargoes
in the future, but the cargoes are never actually delivered. Instead, the
traders buy and sell those contract instruments, making a profit on the
price differential between the contracts.
For instance, if I buy a prior contract between A and B to sell one cargo
(300,000 barrels) of oil at $18 million, and then proceed to sell that same
contract to C for $20 million, the price difference between those two
transactions—$2 million—is my profit. Taken together, all of the energy
futures contracts traded in New York and London by commodity indexes
like Goldman Sachs Commodities Index (GSCI) and Dow Jones AIG
Commodities Index (DJAIGC) amount to $1 trillion.
Finally, exchange-traded fund securities, which track the price of light
sweet oil on the New York Mercantile Exchange (Nymex), the commodities
trading floor in lower Manhattan, have also proved very rewarding.
They can buy and sell an oil contract on behalf of an investor when the
price is right, and then sell that contract at a profit, which goes to the investor,
whose only obligation is to pay a transaction fee.
14 INTRODUCTION