An oil play for ravin’ cravens

Last weekend, I filled my tank for less than $30, something that hasn’t happened since I had hair. For anyone who uses petroleum products — that would be just about everyone — the drop in oil prices is good news.

Jonathan_G_Meath_portrays_Santa_ClausHow good? Really, really good, according to Tom Kloza of the Oil Price Information Service. According to his estimates, Americans will have about $8.22 billion more to spend in the 40 shopping days before Christmas in 2015 when compared to last year. If you compare that to 2013, when gas was far more expensive, the savings is $16.3 billion. (Gas prices peaked in July 2007 at $4.11 per gallon).

Those who heat with gas or heating oil have similar reason to rejoice. Natural gas prices have fallen to near their all-time lows, and at just above $3 per thousand cubic feet, they are nearly 50% lower than their recent high of $6 per thousand cubic feet. Heating oil, too, is nearly 50% below its recent highs.

For investors, the news is terrible, since profits in the energy sector have dropped some 66%. But let’s dry our eyes for the oil companies for a moment: After all, many of the major oil stocks look cheap, at least measured by their yields and their price to earnings ratios.

If you’re tempted by oil prices, yet at heart a coward, there is a milquetoast play on oil: Treasury Inflation-Protected Securities, or TIPS. The price of a TIPS rises with inflation, and the Treasury uses the headline number for inflation, which includes energy.

Using the headline number, inflation rose by exactly zero the past 12 months. If we look at the current 10-year TIPS yield and subtract it from the 10-year Treasury note yield, we see that Wall Street anticipates inflation to average 1.6% the next decade.

Should oil prices rise back to the $60-$80 range, as analysts expect, then current TIPS prices are probably underestimating inflation. In other words, TIPS should perform better than high-quality 10-year bonds.

Are you going to get rich from TIPS? Heck, no. TIPS are purely for those terrified of both stocks and inflation. But if you’re looking for something a bit less appalling than your other bond choices, a TIPS fund might be your best bet.

 

 

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